America Movil (AMX, quote) and Grupo Televisa (TV, quote) both dropped in Wednesday trading as a result of new legislation designed to further liberalize the Mexican telecom sector. Is now the time to pick up America Movil at a discount?
Carlos Slim has benefitted from America Movil’s monopoly in Mexico
Under previous administrations, companies in the Mexican telecom sector were allowed to operate as monopolies and/or duopolies. This advantageous operating environment for companies has bolstered profits for America Movil and Grupo Televisa for decades, rocketing America Movil owner Carlos Slim to the position of the world’s richest man.
However, recently-elected President Enrique Pena Nieto is keen on reining in these monopolies and duopolies; the lack of competition in the Mexican telecom sector alone reportedly costs the country’s citizens $20 billion a year.
While unequivocally a step in the right direction for the Mexican consumer and the economy (EWW, quote) as a whole, these liberalization measures will assuredly adversely affect companies in the Mexican telecom sector like the aforementioned America Movil.
While America Movil has expanded its operations into most of Latin America, including substantial operations in Brazil and Colombia, the company earns a disproportionate share of its revenue from Mexico thanks to its advantageous pricing power. America Movil currently has a 73% share of Mexican wireless users.
This dearth of competition allows America Movil increased profitability in Mexico; on a per customer basis, Mexico makes roughly 35% more on its Mexico operations than its Brazilian operations, as the latter has a more competitive telecommunications marketplace.
As a result of increased liberalization, expect the company’s profit margins to erode in Mexico due to increased competition from new entrants. Going forward, the company will likely remain profitable, but investors can expect to model in more modest profits from America Movil’s Mexican operations.
Much of this bad news has already been priced into the stock; however, the trend in America Movil indicates further downside still. Until this stock bottoms, traders should look to play America Movil to the short side. As for investors, we don’t want to try and catch a falling knife, but once this stock finds a bottom, we could potentially see a lot of value in this beaten-down Mexican telecom.