AT&T Inc. (NYSE: T) made big headlines with its agreement to buy DirecTV (Nasdaq: DTV) in a cash-and-stock deal worth $67.1 billion.
Takeovers can provide huge windfalls – if you own the stock beforehand.
But this deal offers you the rare chance to profit after the fact – if you know where to look.
South of the Border
If you pay too much attention to the pundits on CNN and talk radio, you might think of Mexico as a land of grinding poverty, drug-cartel wars, and people trying to sneak across the border to the United States. But if, like me, you know to look past all that Noise and gaze hard at the numbers, you know Mexico is a land of tech-investing opportunity.
To be sure, Mexico has its problems and still can’t match the wealth and infrastructure of its neighbor to the north. But this is a nation on the rise, and – this is good news for us – it’s increasingly tech focused.
In roughly the last decade, incomes in Mexico have increased some 60%, according to figures compiled by the World Bank. The agency says the country’s gross national income (GNI) per capita was $16,140 in 2012, the last year for full data. That compares with $10,400 in 2003 – and is still well below the comparable figure of $52,340 for the United States.
But Mexico is moving in the right direction.
The nonprofit researcher Brookings Institution recently reported that the auto industry has added more than 100,000 new jobs in Mexico since 2010. That means the auto companies employ more people in Mexico than in the American Midwest, where Detroit once reigned supreme as the world’s auto center.
And they’re not done employing Mexicans and turning them into consumers who like to buy mobile plans, smartphones, and all the other trappings of middle-class life. Top global carmakers plan to expand production in Mexico over the next few years. It all adds up to about $10 billion in new investment, according to the Brookings report.
I see the auto industry’s commitment as evidence of rising incomes in Mexico, where millions of young people are using higher education to enter the middle class.
The Mexican government sees this, too, and is taking steps to nurture the advance.
In July, for instance, the Mexican government announced an ambitious program to invest $300 billion in infrastructure projects through 2018. Of that, roughly $100 billion will go toward new highways, rail lines, and telecommunications facilities. The plan also calls for upgrading ports to spur the growth of Mexico’s exports.
The Mexican government wants to increase economic growth to 6% a year compared with the 2.3% to 3.3% that Mexico’s central bank is projecting for 2014.
As part of its growth agenda, Mexico wants to focus heavily on deregulating its telecom industry.
And that’s where our “backdoor profit play” comes in …
A Rich Ringtone
Finding a way to tap into Mexico’s newfound wealth can be difficult, as many industries are still state run, and many of its public companies are not U.S.-listed – making them tough to invest in.
But the AT&T-DirecTV merger gives us a backdoor path to profit on a Mexican tech-and-entertainment firm that is a global leader in its field, and that is U.S.-listed.
Best of all: We have a chance to snap up these shares at a discount right now.
Here’s why …
AT&T faces regulatory questions in its drive to buy DirecTV – and not just here in its home U.S. market.
In part to win over regulators in Mexico and elsewhere in Latin America, AT&T is selling a $6 billion in stake – about 8% of the company – it has held in stock it owns in the region’s dominant mobile company. It also needs the cash to finance the merger.
The company in question is América Móvil (NYSE: AMX). The company ranks as the world’s fourth-largest wireless firm and boasts some 19.7 million pay-TV customers and 246 million wireless subscribers in Latin America.
It dominates in its home market of Mexico, where it has roughly 70% share of the mobile market and 80% of the business for wired services.
Nobody Misses Ma Bell
When you read the headline news that a giant like AT&T is getting out of a foreign market, it’s easy to get the impression that this is a country you ought to avoid.
Don’t make that mistake.
América Móvil traces its roots back decades and was formerly part of Telefonos de Mexico SA, the state-run monopoly also known as Telmex. Carlos Slim, one of the world’s richest men, owns roughly 40% of the América Móvil, making it a key part of his financial empire.
Mexico’s Congress of the Union has approved a reform of the country’s telecom laws. The idea is to usher in more growth and a more tech-centric populace by opening the sector to greater competition and allowing more foreign investment.
And you know what that means: América Móvil faces a very real possibility that it will lose some of its de facto monopoly status. That, in turn, has many investors worried that hard times are ahead for this sprawling firm.
In fact, the day AT&T announced its divestiture, AMX shares lost roughly 4% of their value, although the stock has since rebounded a bit.
But I believe investors are overreacting to the possibility of big changes at AMX and don’t realize how much good news – and profit potential – is ahead. What the investment community is missing is just how lucrative big changes at América Móvil could be for the company’s shareholders.
Think back to telecom deregulation here in the U.S. market. The proposed breakup of Ma Bell spawned all sorts of doomsday predictions about what would happen to both customers and investors.
Just the opposite occurred.
Indeed, a 1989 study by Fortune magazine showed that shareholders who hung on to their original stock and rode it out through all the changes more than doubled their money on AT&T in less than six years.
And with all the wheeling-and-dealing and buyouts that have followed, investors who stayed for the entire telecom-deregulation party have made out very well, indeed.
I believe something similar will happen in Mexico and that AMX shareholders who are patient could reap a major windfall over the next few years.
So far, the Mexican government hasn’t said exactly how or when it intends to bring about changes to the telecom industry. But it has a big incentive to bring about U.S.-style deregulation: Right now only about 20% of the population has a broadband subscription and just fewer than 40% of the folks there have Internet access.
Let’s run some numbers.
Trading at roughly $20 a share, América Móvil has a $70 billion market cap. It has operating margins of 19% and a 27% return on stockholders’ equity. The stock has a forward price/earnings (P/E) ratio of just 11.35, meaning the shares are trading at about a 40% discount the Standard & Poor’s 500 Index.
That’s not all. At current valuations, we have a good margin of safety based on solid empirical data. Over the past year, América Móvil shares haven’t closed below $18.95, which is only about 6% below current prices. The stock also pays a 1.7% dividend.
This is one of the investment opportunities where the actual risk is much less than what the market perceives but where the potential rewards are substantially higher.
On Wall Street, an aggressive investing strategy tends to win plaudits and earn respect.
But I’ve found through the years that you can often earn even bigger returns by entering through the backdoor – when most folks aren’t looking.
América Móvil is just the latest opportunity of that type.