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Saturday, July 24, 2010

What's Next for Millicom (MICC)?

Several of my friends know that I am very excited about the prospects for Millicom (MICC). For the uninitiated, MICC is a Luxembourgian (though Swedish in origin) provider of cellular phone service in developing countries ranging from Costa Rica to the DRC in Africa. Africa, incidentally, is far and away the largest driver of sales growth in recent quarters. It also has a cable business in some central American countries, but that is not its predominant product line.

Most of what MICC provides is pay as you go cellular service, which fits developing markets well. Rather than having smartphones that even a middle class American might go broke on, they distribute cheap, damn near disposable phones in these markets and allow their customers to purchase however many minutes they want. In countries where landlines are almost non-existent and they went straight to cell phones this makes a lot of sense. Phones are used on a limited basis in most of these countries, often only for essential purposes. With low incomes, paying a recurring monthly charge for service you are not using makes little sense.

In any case, after a brush with bankruptcy in the early 2000s, MICC revamped and has been growing at a good solid clip ever since. Revenues have more than doubled in the last four years and will likely nearly double again in the next five. For all of the growth they have seen, the company still only had just over $3.4 billion in revenue in 2009. This isn't a great comparison, but just for the sake of something to compare to, Verizon (VZ) had revenues of $107 billion. Operating margins have also improved from 75% in 2006 to 82% in 2009. Net profits have been a little hard to interpret due to many acquisitions, divestitures, and their associated write-downs and one time profit gains. Based on operating profits though, there has been steady improvement.

The balance sheet is not overly leveraged with its cash position growing in line with its long term debt. This is important from the standpoint that if there is, God forbid, another financial shock like 2008, MICC is not vulnerable to a financing crunch. I've become more cognizant of that as an issue with companies since the crisis.

The recent earnings report, released just this last Tuesday was a thing of beauty even though on the surface it looked like a bad miss. The market realized this too, and the stock was notably higher by the end of the day after selling off in the morning. Revenue growth of 14% (11% after currency adjustments) and earnings growth of 17%. Customer base growth was near 20%, which is a promising sign for future revenue and earnings growth. All of this leads to a stock that trades at a modest 13.4x forward earnings. That's hardly steep and in normal times with their growth rates would be a steal.

As mentioned briefly earlier, the growth rates in Africa are astounding. Fully 3/4s of the subscriber growth came from Africa in the last quarter, partly driven by depressed numbers elsewhere from divestitures, but still this is an amazing thing. Africa has averaged just shy of a million new customers a quarter in the last three quarters.

Now, they do have competition for these rapidly growing markets, but market share has been steadily ticking up. It's always a good thing to have a growing portion of a rapidly expanding pie. The African numbers looked like a disappointment, but actually the market share number took a hit from entry into Rwanda since they had no presence there before. Adjusting for that, market share is growing in Africa.

All that said, the outlook for MICC looks promising and I think this is reflected by the fact that the stock has held up quite well during the recent sell off in the broad market the past few months and its gains when the market rises tend to be greater than the overall market. That said, it is a lightly traded stock at less than a million shares a day and often less than 500,000. It can be easily moved in a bad day and drop $4-6 a share. If you cannot stomach that, it might not be right for you. Still, opportunities to play growth in Africa directly are rare, even when they are a little volatile.

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