Carlos Slim's America Movil: This Impressive Telecom Giant Is Still on the Move

by Tony D'Altorio

Carlos Slim's America Movil: This Impressive Telecom Giant Is Still on the Move

by Tony D'Altorio, Investment U Research

Wednesday, December 1, 2010

According to Forbes, Mexican billionaire Carlos Slim is the world's richest person.

That's in some part due to America Movil ADR (NYSE: AMX), Latin America's largest telecom company by assets. In the 10 years since it spun off from Telmex, it has grown from a small provider into an impressive giant.

The company quickly gained 216.8 million subscribers in 18 countries. That easily places it among the top four mobile phone providers in the world.

This year has proven equally profitable, beginning in January, when Mr. Slim announced the merging of his telecom empire. That included America Movil buying its parent company, Carso Global Telecom, which controls Telmex - a fixed-line company - and its counterpart, Telmex International.

Valued at about $25 billion, it became the continent's biggest deal of the year. And its purpose was for AMX to offer customers aggressively priced quadruple play packages.

These pre-bundled plans consist of fixed-line, broadband, mobile and pay-TV services. AMX hopes that will help it beat out Spain's Telefonica ADR (NYSE: TEF) as the number one Latin American telecom provider.

Yet judging by its network of over 290,000 kilometers of fiber optic networks, AMX has already accomplished that goal. As Christopher King, an analyst at Stifel Nicolaus, puts it, "In terms of infrastructure, America Movil has no rival in the world."

America Movil's Success

America Movil has managed to grow so quickly, in part, due to Telmex.

Mr. Slim first bought a controlling interest in the company for $1.7 billion in 1990. Today, Telmex has over 15.6 million fixed lines in Mexico ... nearly 80% of the market.

That near-monopoly generated $1.7 billion in free cash flow last year alone! In turn, that extra income made Slim's expansion plans much easier.

He also bought up many small and relatively cheap telecom companies in the area, like the 2003 purchase of CTI in Argentina. Those certainly helped America Movil as well.

Finally, much of the company's success came from its prepaid business model. This allows people to buy handsets and top-up cards in place of formal contracts.

And it allows AMX to access Latin America's growing population a lot quicker.

The Future of America Movil

America Movil now has 266 million subscribers. On top of its mobile phone customers, it boasts 28 million fixed-line contracts, 12.5 million broadband accounts and 9.4 million pay-TV subscribers.

That large customer base has some people worried that its rapid growth might be slowing. But the recent investor day meeting - only AMX's fourth - allayed those fears...

The company said it expects to gain almost 100 million mobile subscribers by 2014. That would swell the division to as much as 310 million customers, resulting in strong revenue growth in the years to come.

Likewise, America Movil foresees a 6% to 8% annual growth rate over the next four years. And it expects earnings growth of 7% to 9% before interest, taxes, depreciation and amortization.

As if that isn't good enough, AMX announced its plan to invest $8.2 billion next year on capital expenditure to keep up with rapidly rising demand for voice and data services. It's no wonder analysts attending the meeting left impressed.

One of those men, Tomas Lajous of UBS, said: "America Movil can deliver double-digit free cash flow CAGR [compound annual growth rate] over the next five years and that is the key. That means free cash flow could go to nearly $15 billion by 2014."

He stressed how AMX is the only company in Latin America currently able to generate $10 billion in annual free cash flow.

Why America Movil is a Company Worth Buying

From day one, America Movil focused on growth. So despite its current size, investors should expect it to continue doing just that.

Many investors viewed its Telmex and Telmex International purchases as mere paper shuffling. But it was actually a brilliant move...

The two kinds of networks - fixed and mobile - are becoming increasingly alike. The protocols used to transmit data along the networks are now pretty much the same.

That means America Movil can now use Telmex and Telmex International to absorb the huge jump in demand for data services from its smartphone customers.

In other words, the company cheaply bought much of the infrastructure it's going to need for growth in the coming years... years that should see it becoming even larger.

Good investing,

Tony D'Altorio

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