Zacks_Analysts' Blog : Earnings Preview: Millicom Int. - Analyst Blog

Millicom International Cellular S.A. (MICC) is an international operator of mobile telephony services. Millicom operates in 13 countries in Latin & Central America, and Africa. The company commands around 53.4% market share in Central America, 16.8% in Latin America, and 31% in Africa. Millicom will declare its second quarter 2010 financial results on July 20 before the market opens.

 

Strong Liquidity and Subscriber Growth

 

Millicom is one of the few companies in the telecom sector that is generating double digit free cash flow yield and subscriber growth year-over-year. The company operates as a near monopoly in several Central American and Latin American countries where it generates significant free cash flow. Millicom is investing this cash in Africa, which has an extremely poor (around 20%-25%) mobile service penetration rate.

 

Agreement of Analysts

 

Despite the above-mentioned positive factors, the recent Zacks Consensus Estimate revision trend is a little disappointing. Over the last 7 days, 1 out of the total 5 analysts covering the stock reduced his earnings estimates for both the second quarter and fiscal 2010. No analyst made any upward earning estimate revision during this period.

 

We believe growing competition in the African markets is primarily responsible for this negative sentiment. Millicom is giving a major thrust to its African operations for future growth. In addition to MTN, global telecom giants like Vodafone Group Plc. (VOD) and France Telecom (FTE) are the other players in several African markets. Recently, Indian telecom major Bharti Airtel entered the African market having acquired Zain’s African assets.

 

Nevertheless, the current Zacks Consensus EPS Estimate of $1.36 for the second quarter indicates a substantial gain of 29.14% year-over-year. Similarly, for fiscal 2010, the current Zacks Consensus EPS Estimate of $5.81 also indicates a handsome gain of 14.75% year-over-year.

 

Magnitude of Estimate Revisions

 

In line with the negative estimate revision trend, the Zacks Consensus EPS Estimate for the second quarter 2010 has reduced by 1 cent during the last 7 days. For fiscal 2010, the Zacks Consensus Estimate is down by 2 cents during the same time period.

 

Earning Surprises

 

With respect to earnings surprises, Millicom’s fairly good track record is not expected to persist in the coming quarters. Millicom produced a positive average earnings surprise of 3.79% in the last four quarters, which means that it beat the Zacks Consensus Estimate by that measure over the last year. The current Zacks Consensus Estimates for both the second quarter and fiscal 2010 contain downside potential (essentially a proxy for future earning surprises) of 2.94% and 0.34% respectively.

Our Recommendation

 

Currently, Millicom is a short-term Zacks #4 Rank (Sell) stock. This is primarily due to increased competition in almost all its markets, gradual decline in ARPU, fluctuating foreign currency exchange rates.

 

At the same time, this is also our view that Millicom’s strategy of offering prepaid cards through mass-market distribution and non-traditional channels has proved to be very effective. The company is likely to benefit from huge capital expenditure it had undertaken to expand and upgrade its networks, which may result in further subscriber growth and revenue. We maintain our long-term Neutral recommendation.