Yesterday morning I wrote
NII Holdings (NIHD) - Ok this one confuses me; the only thing I can figure out is there is some cell phone industry growth ratio that analysts had, which the company did not exceed. Or guidance was not good enough. They beat on the top and bottom line and the stock was trashed by 18%. I had a 1.7% position in NII Holdings and bought 130 shares to the 290 I had, increasing the position by 44%. Just like with Cummins I don't expect a quick rebound but when I can buy these quality businesses for a nice discount I will take the opportunity.
The day before I had written:
I hope they come out with bad news, disappoint, and can finally sell down to an area it makes a bottom so it can begin the rebuilding process. I really like the potential in this company, but its been stuck the entire quarter in molasses.
S
So what's the word on the street now...
via Forbes:
- A company lives and dies by its numbers come rain, shine or hurricanes in Mexico. So despite a 24% increase in profit for the third quarter and earnings per share which blew away Wall Street’s expectations, it was NII Holdings lower sequential subscriber growth that disappointed analysts.
- The mobile communication provider for businesses in Latin America saw its net income increase to $81.6 million, or 46 cents per share, up from $65.7 million, or 38 cents per share in the prior year. This includes a $22 million charge related to its debt offering. Excluding the charge earnings were $104 million, or 61 cents per share, which beat analysts expectations by 8 cents.
- Sales soared 39% to $852.9 million up from $615.6 million in the prior year driven by higher subscriber numbers with net additions rising 23% compared to the same period last year.
- NII added 327,000 net subscribers during the third quarter for a total of 4.4 million subscribers, a year-over-year increase of 38%. But the company had added 331,000 net subscribers in the second quarter.
- The sequential difference in subscriber growth disappointed investors and they let the company know it. The Reston, VA.-based company’s shares plunged 21.3%, or $14.82, to $54.62 on Thursday afternoon.
- Steve Shindler, chief executive officer of NII, said that the slower subscriber growth was due to an increase in competition in Mexico and bad weather which impacted businesses in some of the company’s key markets for the quarter. He said the company is working hard to meet its previously raised guidance of 1.275 million net subscriber additions for the year.
- Wachovia Capital Markets analyst Gray Powell said the hurricanes in Mexico cost the company between 10,000 and 15,000 additional subscribers. Although, Powell says, the hurricane doesn’t explain all of the third quarter’s subscriber shortfall, the company believes things will improve in October, which should begin to show in the fourth quarter.
- The company also said the number of net adds in 2008 will be higher than 2007 and should be up in Mexico next year. “This indicates to us that the story is NOT broken and that the potential for strong growth still exists,” Powell said. Although Powell said “stock is likely dead money for the next few months due to a lack of catalysts” he thinks the stock over the longer term is more compelling. He rates the stock an “outperform.”
- Shares of NII Holdings Inc. sank Thursday after the wireless service provider to Latin American businesses posted what one analyst called "worse than feared" third-quarter results.
- NII added 327,000 net subscribers during the quarter, below analysts' consensus estimates of 350,000, noted Thomas Weisel Partners analyst James D. Breen.
- He said the weakness in net customer additions came mainly from Mexico, due to disruptions from hurricanes and increased competition, and from Brazil. Breen nonetheless kept an "Overweight" rating on the stock.
- "Despite lower than expected net adds in Mexico, we continue to believe that the company's growth prospects in both Mexico and Brazil remain strong," he wrote. Breen said NII remains his top pick in the wireless sector amid high growth prospects in Latin America.
- Stifel Nicolaus analyst Christopher C. King, meanwhile, called the quarter "worse than feared" and said competition from Telefonica SA's Movistar unit in Mexico, along with weather problems, likely hurt results. He nonetheless kept a "Buy" rating on the stock.
- Deutsche Bank analyst Rizwan Ali called the stock price drop a buying opportunity. "We believe the weakness in the quarter should not indicate a long term trend as the level of service and the technology offered by NIHD is still very attractive to its target market segment," Ali wrote.
Takeaway: Well there you have it folks; classic Wall Street fear. A growth stock that as it gets bigger actually slows down a bit growing (law of large numbers). So they beat top line; they beat bottom line but their SEQUENTIAL net subscriber growth was negative, hence it means trash the stock 20%. It all makes sense now. Yes there will be competition; very few companies are able to operate in monopoly conditions but we have young markets where cell phone penetration is far below US or western Europe (or even many parts of Asia), and a focus on the business customer which has more profits. Anyhow that's all thrown out the door.
So let's say the company can only grow (gasp) 28-32% over the next 2-3 years, instead of 40%. Let's say next year's $3.59 is at risk and they are going to be 10% lower at $3.23.
At a price of today's $59, I get a company growing 30% for the next few years in a young market and trading at 18.2x my $3.23 earnings number. Now keep in mind I just made that figure up; despite the (gasp) lower sequential subscribe adds (year over year adds are still very high), the company still beat their earnings number ($0.61 vs $0.53 analyst expectation) so my lowering to $3.23 is truly saying things are going to go downhill.
If you still believe the $3.59 figure for 2008 than it trades at 16.4x next year's earnings. And I am claiming only 30% growth - the projections are still upper 30%s. So that should expand the PE ratio even higher.
So what we have here is a very technically broken stock (both the 50 and 200 day are way up there in the low to mid $70s range), which is trading at about half its growth rate simply because wall street is obsessed with sequential growth and could care less about year over year growth. If the PE here was 60 before the earnings I could understand the sell off, but it wasn't even half that. So it looks like yet another overreaction. While the stock might not rebound soon, it has now turned into a 'value' in the growth space so a year from now when they hit mid $3.00 earnings with a 30%+ growth rates I think it will be worth a bit more than this measly $59. Amazingly the stock is at its lowest point in 12 months, despite tacking on a whole lot more of earnings power from where it sat in October 2006. Shows the power of multiple contraction. For those with patience this will reward... as I wrote in green above, we now have the bad news out in the open that the stock was telegraphing this quarter by its weakening stock price, so the boogeyman is now a bit less scary since its not under the bed and instead on the P&L.
Long NII Holdings in fund; no personal position
