We are reiterating our Sell recommendation on Telmex (TMX). First quarter 2008 results were lower than expected. As a result, we are changing our 2008 and 2009 estimates.
Moreover, the Mexican domestic growth has also stalled. Expansion in other Latin American regions, particularly Brazil, is expected to continue in the near future. Meanwhile, the company still needs to increase the profit margins of its acquired units, which are currently well below that of its Mexican business.
Its valuation seems excessive if compared to other Latin American operators, and the difficult economic environment in the U.S. is a source of concern. TMX is trading at 11.9x our 2008 revised earnings estimate, which represents a significant discount to the forward P/E ratio for the S&P 500 and the industry average. TMX's P/E discount mainly reflects slow projected growth for the Mexican local phone business as well as uncertainty surrounding the impact of recent acquisitions to further expand in Latin America, and the uncertain business environment is some Latin American countries.
However, if we consider the EV/2008 EBITDA valuation, the stock does not seem to be undervalued at all. Indeed, we continue to have a positive outlook for Latin America economic growth, however the difficult economic environment in the U.S. should have a negative impact on Mexico in the very short-term, and the company is still highly dependent on the Mexican performance.
All considered, we are reiterating our Sell current recommendation on TMX. Our six-month target price is US$30.50 per ADR is based on EV/2008 EBITDA of 6.0x, closer to the valuation of other Latin American telecom operators.
Read the full analyst report on TMX.
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