Millicom (MICC) Redux

Back in the Day…

A few months ago I wrote about Millicom International Cellular (MICC) – a wireless services company that provided pre-paid mobile phone service to third world countries. Generally I recommend stocks because I feel there’s an underlying fundamental strength within the industry or company. In other words, the industry or company offers something unique that is being under-appreciated in the marketplace. This was exactly the case when I recommended MICC when it was trading at approximately $52 a share. Back then, the markets seemed to be on their way to recovery and I felt that wireless communications would be one of the first industries to recover in non-industrialized markets. I also mentioned that I felt MICC had the potential to reach $70+ and beyond based on the recovery rate of the marketplace and how much the market discounted the stock.

Where Are We Now?

Low and behold, last week MICC hit $75+ a share. If you had invested in the stock when I had wrote about it (let me know if you did, it would make my day!), you would’ve made a cool 44% in approximately 2 months – well outpacing the market and about 100 times better than any savings account in the world! Now, you may say ‘Sahil, shouldn’t I sell everything now since it has hit your price target?’ Well, like most things in investing (life?) that answer isn’t so simple. We first need to understand why MICC was able achieve this upside explosion in such a short period of time. Was the market really this wrong about the stock? Well, the main reason we saw this run-up was because the company reported profits for the last quarter that were well ahead of expectations. They basically stated the following key points about their business:

1. Number of Subscribers up 25% to 30.8 million
2. EBITDA (earnings before interest, taxes, depreciation, and amortization) up 14%
3. Free Cash flow of $59 million

I think all 3 of these points are key positive indicators for MICC and are necessary components for a company on the upswing.

Now, this surprisingly good news for MICC was even better than what I expected – yes I suspected that MICC was being given enough credit in the market for their strong business model and the many indications of economic recovery, but even I didn’t expect 44% in 2 months. I didn’t expect it to experience such a drastic recovery in its business. At the end of the day, I feel that MICC is still doing better than most people expect. I’ve now reassessed my impression of the company with the latest results and have developed a new recommendation. At the peak of the market, MICC was trading at $120+. Although I don’t think it’ll reach that point anytime soon, I am comfortable with saying that with the latest quarter’s results, I think the stock can at least get to $90. In Wall St. talk, I’m raising my price target for MICC.

This isn’t a straight endorsement to buy the stock (or not sell if you already own it), and it shouldn’t be taken as such. That really depends on your investment horizon. Short and medium term I think the stock will have a little bit of a breather. I wouldn’t be surprised to see it go down back to the $60s. But by early next year, if and when the economic recovery really begins to show signs of life, I expect to see a runup to $90. Moral of the story? Don’t jump headlong into the stock yet, but keep a very close eye on it.

Possible Downsides

There are, as always, strings attached to my recommendations. The basic assumptions I’m making here are a continuation of the recovery of the economy – especially in the international market. And don’t mistake a stock market recovery as an economic one. I really want to see fundamental economic indicators (consumer spending, GDP, manufacturing ouput, and to a lesser extent unemployment) to recover. I also am assuming that MICC will surprise the street with positive news next quarter too. The market gave it a nice shot in the arm for its last quarter, but investors are fickle, and if the good times don’t continue, the stock can hit a snag. So, with that said, I think each investor needs to make a decision on how they want to tackle MICC. If it does hit the $60s again, though, I would seriously consider buying in.

Millicom's performance vs. the S&P 500 in the last 3 months:

In case you missed my initial post on MICC, read it here:

http://investingdecoded.blogspot.com/2009/05/stock-discussion-millicom-international.html

Questions/Comments/Feedback?
Please don’t hesitate to let me know of any questions or comments you have about this post or any other. If you want me to write about something else investing related, do let me know!

The Standard Disclaimer:

The stuff I just wrote above is my opinion and my opinion only. Please do not take it as fact. Perform all necessary research and analysis prior to acting on anything I've said above. This includes consulting with a financial advisor.