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Finding Telecom and Media Value Beyond the Border

As telecom and media valuations in the U.S. move sharply higher, Mexican firms Grupo Televisa and America Movil trade at a discount.

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Michael Hodel: Telecom and media valuations in the U.S. have moved sharply higher over the past year, leaving few opportunities, in our view. As an example, AT&T and Disney, our best ideas in the sector in 2019, have both run past our fair value estimates. As a result, we recently turned our attention south of the border, as we believe two Mexican firms provide reasonably attractive valuations. Wide-moat-rated Grupo Televisa trades at a nearly 30% discount to our fair value estimate, while narrow-moat America Movil trades at a nearly 20% discount.

The Mexican telecom industry still offers strong growth opportunities. Broadband penetration and DSL market share in Mexico both remain years behind the U.S. market despite increased coverage from both fiber optic and cable firms. We expect that broadband penetration will continue to increase as the Internet plays an increasingly important role in everyday life and more Mexican consumers gain exposure and access.

We believe that Grupo Televisa is well positioned to benefit from both increased broadband penetration and demand for faster Internet access speeds, which the firm's cable segment can deliver efficiently. We view the cable business as a hidden gem within the broader media firm. Televisa's cable segment should generate higher cash flows in the coming years on lower spending needed to build its network.

On the mobile side, wireless penetration has likely peaked, but data usage and wireless revenue remain relatively low because of the prevalence of prepaid plans, which are still used by 80% of consumers. America Movil has weathered the entrance of AT&T and stiff price competition from Telefonica to remain the dominant mobile carrier in Mexico. We think that the shift toward postpaid plans and a return to rational pricing will lead to higher wireless revenue and improved cash flows.

Movil also has an extensive presence in Latin America outside of Mexico. Its business in Brazil is particularly well positioned, as it is the largest cable company in the country and also a major wireless carrier. We expect the firm's performance in Brazil will steadily improve, again as wired and wireless Internet usage become more pervasive. Any improvement in the Brazilian economy could also provide a lift to the business.

Mexican telecom and media firms will likely be more volatile than their U.S. counterparts, but the increasing importance of data and Internet access in the daily lives of consumers should provide relative stability over the longer term. 

Michael Hodel does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.