NII Holdings Rings Up Latin American Success

This is a modified version of the Passport Portfolio section of the January 2009 Morningstar InternationalInvestor newsletter.

I am the strategist and editor of the Morningstar InternationalInvestor newsletter. The newsletter includes a live portfolio--the Passport Portfolio. From March 1, 2008, when the Passport Portfolio went live, through Dec. 12, the portfolio was down 17.4% versus the S&P 500's return of negative 32.6% and the Bank of New York Mellon ADR Index's return of negative 41.1%.

On Dec. 9 I visited the portfolio's second-largest holding,  NII Holdings , along with Jacqueline Zhang--the analyst covering the firm. It was a very good visit and I came away more confident than before. NII was formerly Nextel International and was spun off from Nextel when the telecom bubble burst at the beginning of the decade. After emerging from bankruptcy the firm has found a very profitable niche selling push-to-talk wireless phone services to small and medium-sized businesses in Latin America. It has been particularly successful in Mexico and Brazil.

When we met with the firm, management had recently returned from spending a significant amount of time in Mexico and Brazil with the local management teams. They said the company's Brazil president was particularly excited about how well the business is doing. Despite economic weakness, which so far is less in Brazil than most countries, growth continues to go very well. In fact, NII is probably benefiting as companies are looking for cost savings; in many cases NII can reduce a firm's telecom bill as calls within its system are free.

Through the first three quarters of 2008, NII grew revenues 39.2%, subscribers 33.1%, and operating income 39.6%. However, revenues are in local currencies and due to the significant pullback in Latin American currencies during the fourth quarter, when revenues are translated into U.S. dollars most if not all of that growth will disappear for the year. I think the dollar has strengthened too far and next year NII will show nice growth in dollars as well as in local currencies.

One other reason to be positive on Brazil is NII's low penetration rate in that country. Most of Latin America's wireless market is prepaid, but within the postpaid market NII has only about 6% market share in Brazil, whereas in its other countries it is around 30%. Argentina is NII's main country at risk as that country has economic and political problems of its own that are independent--though exacerbated--by the global recession. Fortunately, Argentina is significantly smaller than Mexico and Brazil.

One other item of note: since Nextel in the U.S. has struggled after being acquired by  Sprint , and  Motorola (MOT) is having its own problems, Motorola has been much more receptive to NII. Motorola designed the iDEN technology that makes Nextel's push-to-talk service work. Historically, Motorola designed phones for the system for Nextel and then let NII pick from those handsets. Now Motorola is involving NII in designing phones specifically for Latin America, which is enabling NII to sell phones that are more popular and reduce the subsidies it pays to induce customers to purchase phones, lowering the costs of acquiring a new customer.

While the iDEN technology has limitations on how far it can be upgraded, which will have to be addressed in the future, these are less pressing in Latin America than in the U.S. The firm has a strong balance sheet; with $1.5 billion in cash the company has plenty of liquidity to continue to expand during the credit crisis. It's trading at some of the lowest multiples since shortly after coming out of bankruptcy at the end of 2002, yet it is now a much more proven entity. While I expect the next couple of quarters to be rough, I think this stock will be a big success in the medium term.