America Móvil

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

America Móvil is a leading telecommunications service provider in Latin America, with operations spanning 22 countries, known primarily for its mobile, fixed-line, broadband, and pay TV services.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

America Móvil (AMX), headquartered in Mexico, is a major player in the telecommunications sector across Latin America and the Caribbean, and has recently expanded into Europe. It offers a diverse suite of services, including wireless, fixed-line, broadband, and pay TV. The company is structured into geographically-focused operating segments which each have different regulatory structures.

  • Wireless Operations: AMX provides mobile services across its geographic areas, including voice, data, and short-message services. They also participate in machine to machine(M2M), and the Internet of things(IOT).
  • Fixed Operations: AMX provides wireline telephone services and broadband to their customers. They also provide bundled packages of different fixed services to a large proportion of their client base.
  • Television Operations: Through their pay-TV operations, AMX provides video content, as well as pay TV services.
  • Other Services: AMX provides cloud, information technology, and other value added solutions to its clientele.

Competitive Landscape: The telecommunications sector is known for its high competitiveness with significant players including Telefonica, Millicom, and Liberty Latin America. Competition focuses on pricing, product offerings, customer experience, and service quality, with an increased focus on technological development. However, this is where AMX differentiates itself. It’s a market leader with a large geographical scale. It has a strong brand that is a cornerstone of its success. However, AMX is subjected to local regulations in the different jurisdictions where they operate, it must have a diverse and adaptable approach in each jurisdiction to be successful. In addition to regulation, the industry is vulnerable to technological changes, which can make infrastructure investments obsolete quickly. Another key aspect is the changing behavior of consumers as new generations enter the market with different communication patterns and expectations.

Financial Analysis

  • Revenue Distribution: In Q3 2023, AMX saw a 2.5% year-over-year increase in total revenues to 211.8 billion Mexican pesos. Service revenues increased by 4.7%, with significant growth noted in Brazil (12.5%), Colombia (12.1%), and Peru (11.4%). Mexico was a drag on revenue, with only 2.7% YoY growth in revenue. The financial figures include the consolidation of ClaroVTR in Chile. However, AMX uses different metrics to represent growth for different business units, so these percentages must be taken with a grain of salt.
    • Mexico generated 34.5% of total revenue in Q3 2023, with 15.2% being generated by Central America, 18.1% in South American Cone (Argentina, Chile, Uruguay, Paraguay), and 25.7% by Brazil. Europe and other operations amounted for 6.7% of the revenue and 3% of “other operating revenues.
  • Profitability & Margins: The company’s focus on profitability is clear through positive margins, especially with strong cost-cutting initiatives. Operating profit reached 46.9 Billion Mexican Pesos in the quarter. This is mainly due to a YoY growth in earnings of 12.4%, with a margin of 21.2%. EBIDTA margins also increased, but slightly, from 38.4% to 38.9%.
  • Cash Flow: The company had operating cash flow of 64.2B Mexican pesos in Q3 2023. This is substantially higher than capital expenditure for the quarter.
  • Balance Sheet: AMX has a strong balance sheet, with 402B Pesos in cash and cash equivalents, and 775B in total debt, resulting in a solid balance between assets and liabilities. The net debt-to-EBITDA ratio was 1.54x as of September 2023, which is a very reasonable number.

Recent Concerns & Management Response:

  • Revenue Growth in Mexico: Management has acknowledged sluggish performance in Mexico and has responded that they have started to implement growth opportunities.
  • Effects of the Brazilian Currency: The recent strengthening of the Brazilian Real has had a good impact on earnings reported in Mexican pesos. However, it also makes the company’s profits more susceptible to currency rate fluctuations.
  • Competition: Fierce competition continues in all the jurisdictions AMX operates. Management has noted they are focused on pricing strategies and cost management in response to this challenge.
  • Regulatory Landscape: Telecommunication companies are susceptible to regulation. AMX continues to adapt and prepare for changes in the market regulatory landscape.

Moat Assessment: 3/5

America Móvil possesses a narrow moat rather than a wide one. This is supported by:

  1. Scale Advantage: AMX benefits from its extensive presence and vast network in several countries, providing local connectivity, economies of scale, and brand recognition with its various regional brands.
  2. Regulatory Barriers: In several of the emerging markets where AMX has a large presence, regulatory restrictions and high capital requirements make it difficult for new competitors to enter the market.
  3. Brand Loyalty: In certain areas, particularly in Mexico, AMX enjoys a decent brand loyalty, which gives them an advantage in maintaining revenues.

  4. Local Partnerships: In many regions, especially South America, AMX has partnered with local companies, giving it a unique understanding of the local markets and regulatory structures.

    Why not a wider moat? * Technological disruptions: The telecom space is constantly changing, and new companies can easily outdo old offerings, making it hard for companies to compete. * Government intervention: Local regulations can easily change, and may cause AMX to lose a portion of its profits. * Easy replication: Network structures and infrastructure (especially for mobile) can be built by different companies.

Risks to Moat and Business Resilience

  • Competitive Pressures: The telecom industry is fiercely competitive and AMX faces constant pressure from other local and global players, including Telmex, Telefonica, and more.
  • Technological Obsolescence: The telecom industry is susceptible to disruption with the advent of new technologies that rapidly make previous infrastructure obsolete.
  • Regulatory Changes: AMX operates in a variety of countries, with different local regulations that can easily hurt their profitability and margins. The Mexican regulatory authority (IFT) has been an example of a regulator that is tough to work with.
  • Debt Levels: While it is currently well-managed, AMX’s high debt levels may pose a risk if interest rates rise or the company’s operating environment deteriorates drastically.
  • Economic Volatility: Emerging markets are particularly susceptible to economic downturns or exchange rate volatility, which can hurt companies like AMX that operate in them.
  • Reliance on Wireless Operations: The company derives a significant portion of its revenue from its wireless business, and may be adversely affected if the industry shifts or other segments improve in popularity.

Understandability: 3/5

The business of providing mobile, fixed-line, and cable services is fairly straightforward. However, the geographic diversification, different business operations, and the complexities of international operations make the company’s financials more difficult to analyze.

  • Pros: The different services the company provides (mobile, landline, cable) are easily understood. The services of such companies are easy to evaluate from a high level.
  • Cons: Given the size of AMX, understanding the overall company financials becomes very complex and requires significant expertise. It’s hard to understand the regulatory, competitive, and economic environment on a country-by-country basis, and how this may affect performance. Also, the fact that AMX operates in so many diverse markets makes it challenging to follow.
  • The company uses some metrics (like revenue-generating units (RGU) in certain operations) that many investors may find confusing, or be unfamiliar with.

Balance Sheet Health: 4/5

The balance sheet of America Movil is strong and generally resilient, due to its consistent cash flow generation. However, there are a few points that need to be considered.

  • Strengths: AMX has a significant cash stockpile (402B MXN), which allows the company flexibility in its investments and potential acquisitions. The net debt-to-EBITDA ratio is also a modest 1.54x.
  • Weaknesses: The company has a large amount of debt, which increases its vulnerability to changing economic and financial conditions, and also to a rise in interest rates. Also, the debt is composed of different types of borrowings in different currencies, which can add complexity to analysis. Moreover, if the company can not adequately generate value through acquisitions in the future, the debt will put an additional burden on the balance sheet.
  • Other Factors: The management has shown their intention to bring debt to more appropriate levels. If they are successful in that, a 5 out of 5 can be assigned for the Balance Sheet Health. For the last quarter, share buybacks were resumed, further reducing the outstanding share count, indicating that management believes the company is not over leveraged.

Overall, America Móvil is a company with a narrow but solid moat, and a strong, albeit complex, business. Although management faces headwinds from fierce competition and local economies, they have several tools at their disposal to mitigate them. While the financial situation of the company is good, and it is consistently profitable, the high debt level and the complex and unstable regulatory environment in various jurisdictions it operates, must be taken into account by investors. I believe that long-term shareholders can benefit from its ability to produce long-term, stable cash flows, as long as a reasonable price is paid.