While the US economy stages what could be considered a “timid” or even “manufactured” economic recovery, Latin American economies appear to be in aggressive growth mode.  As a large portion of the population integrates technology into their daily lives, the demand for wireless service is growing.  And several healthy companies are hard at work building out these services.

Today we’re going to look at NII Holdings Inc. (NIHD) which is one of the smaller wireless carriers in South America.  With a subscriber base of 7.4 million, NIHD is dwarfed by rivals America Movil (AMX) and Telefonica (TEF).  But unlike its rivals, NIHD concentrates on a specific profitable niche of the wireless market – small businesses and corporate accounts.  So while AMX and TEF are appealing to the masses and collecting an average monthly revenue per user near $11.50, NIHD recently reported revenue of $45 per account – quite a difference.

As the Latin American demand for service grows, NIHD has made aggressive expansion plans and is actively increasing its rollout of 3G coverage.  Over the next year, the company expects to spend between $850 and $950 million to build out its network – the majority of this capital being deployed in Chile and Peru.  Analysts also expect the company to be an active bidder this spring when a large portion of wireless spectrum in Mexico is auctioned.

Opportunities with 3G spectrum encompass more than just the handheld phone market.  There is speculation that NIHD will eventually begin selling connections for laptops and even desktops as its business clientele begin to demand the ability to access data on more devices.  The potential for lucrative contracts for business data could provide additional revenue growth for the company – and for existing markets this would require little additional expense.

The metrics surrounding subscriber growth appear to be very healthy.  Over 2009, the company added roughly 1.2 million new subscribers and did this at an average “cost per gross add” of $271.  Since average revenue is $45 monthly per account, it only takes six months for the revenue to make up for the cost to acquire each new customer.  And NIHD’s churn rate is relatively attractive at 2.0% in 2009.  The trend actually looks favorable as the fourth quarter experienced only a 1.85% churn rate.  Satisfied customers lead to better margins – and it appears NIHD is keeping customers very happy.

We expanded our network to about 15 million additional people during the year, with most of that expansion in Brazil. We believe these investments will continue to enhance our brand and visibility, positioning NII to generate more profitable growth in the future. ~Steve Dussek, CEO

One of the biggest challenges for smaller wireless customers is the capital expense necessary to increase coverage.  On February 15^th, the company announced that Grupo Televisia will invest $1.44 billion in cash to acquire a 30% stake in NIHD.  The additional capital will be instrumental as NIHD heads to the auction table for the Mexican spectrum.

Even before this capital injection, NIHD had a very attractive balance sheet with $2.5 billion in cash.  The debt level is high (at $3.49 billion) but with plenty of cash on hand, this is not a significant problem (especially considering the attractive cash flow from existing subscribers).

In 2010, management is guiding investors to expect revenues of $5.2 to 5.4 billion.  NIHD is also expecting to add 1.275 million to 1.375 million net new subscribers.  Assuming these expectation are correct (and they are most likely conservative) shareholders could see NIHD continue its positive trend for months to come.

At $42.25, the stock is just off its 52 week high, but has a long way to go before reaching its 2008 peak of $57.05 or the all-time high above $92 logged in 2007.  And yet the company has higher earnings than during these speculative price periods.  Waiting for a pullback may be the wisest way to accumulate shares of this Latin America growth opportunity, but don’t expect the stock to pull back too much given the growth opportunities and management’s strong track record.

FD: Author does not have a position in NIHD

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