An Intriguing Change of Heart

Fears of competitive pressures have sent shares of NI Holdings (NIHD) to less than half their 52-week high. Those fears are legitimate for this Latin American wireless play -- but, at this point, they're arguably priced into the stock. Equally important, the company's assets are likely worth far more on a private-market-value basis. Formerly known as Nextel International, NI Holdings provides wireless communication services to 10.2 million customers under the Nextel brand name in Mexico (40% of sales), Brazil (35%), Argentina (13%) and Peru (12%). The Virginia-based firm's products include mobile telephone and mobile broadband services. NI's International Direct Connect service allows subscribers to communicate across national borders. The company is also rolling out data services, including text messaging services, mobile Internet services, email services and GPS-based location-based services. The company is a distant third in the Latin American market, behind America Movil and Telefonica. Those firms offer wireline services, as well, whereas NI Holdings is a wireless pure play. NI Holdings footprint reaches 194 million potential customers. The Nextel push-to-talk technology has made the company a hit in the business community, which accounts for the bulk of its sales base. NI has started to roll out 3G services in its four key countries, but still has modest market share in each. That technology is much better suited to texting, email and Web browsing. The company expects to have a more robust 3G network in place in each country by the middle of this year. Long-suffering shareholders of NI Holdings should finally see growth in the firm's profits when the new 3G platform is up and running, but present financial results have only benefited investors looking for a better entry point into what has become more of a value play. NI Holdings reported 12% revenue growth for the fourth quarter of 2011, roughly in line with that of its peers. But, due to the recent strength in Brazilian real and the Mexican peso, that gain becomes just 5% when converted back into dollars. The continuing selloff in this stock after February earnings is likely also attributable to a decline in average revenue per user (ARPU). That figure was around $50 at the end of the third quarter, but dropped to $48.23 in the fourth quarter, in part because the company is adding more customers in the more price-sensitive consumer market. Still, this is a maturing industry, and ARPU is likely to stay in the $45-to-$50 range for the foreseeable future. In any case, the NI Holdings story is as much about a land grab for customers as it is about pricing. So the fact that the company added 467,000 net new subscribers in the quarter is a heartening metric, as it was about 50,000 ahead of consensus forecasts. Still, I also acknowledge that 2012 will simply be an OK year as the company boosts marketing spending to retain or build market share. Management expects to boost sales 6% this year, though if you back out currency effects, that stands to come in closer to 15%. This is the result of a projected 1.4 million net new subscriber additions -- a forecast that appears conservative in light of the fourth-quarter sub adds. NI Holdings added 1.7 million net new subscribers in 2011. However, the heavy spending on marketing is dampening the bottom line, and management expects earnings before interest, taxes, depreciation and amortization to fall around 10%, to $1.4 billion. To be sure, this stock may require some patience. It's quite cheap at 4x 2012 EBITDA, and I still believe this will be a solid EBITDA grower in subsequent years. But there are few near-term catalysts, save for the buyout chatter that pops up periodically. So, I admit that NI Holdings is a stock that only longer-term value investors -- or insiders -- can like. Five NI Holdings insiders purchased more than $2 million worth of company stock between December of last year and this January. All five of the buyers increased their holdings by significant amounts with their latest transactions. All the bullish insiders were also last seen smartly selling their firm's shares north of $40. Two of the buyers were sellers just last summer, so the insider activity doesn't just represent a significant cluster of activity. It also represents an additional -- and seemingly unanimous -- positive reversal of opinion. Of further interest has been that two of the insiders bought shares via brand-new 10b5-1 (automatic trading) plans adopted by the reporting persons on Nov. 22. 10b5-1 plans are usually used to give executives legal cover to sell shares at predetermined times, even if trading windows would normally be closed to them. While there definitely are 10b5-1 buying plans on the books -- and I see the AB transaction type they generate in my proprietary data feed practically every day-- they are a rarity. Rarer still is for two automatic buying plans to be set up at once after insiders had last been seen selling less than six months before. What the action tells us is that the two insiders buying through their new 10b5-1 plans feel so strongly about the value of NI Holdings that they want to place their bullishness in button-down mode. Insiders' optimism certainly hasn't paid off yet. But NI Holdings, with a large and stable customer base, it appears to be a great way to play rising incomes and telecom consolidation in Latin America. To see NI Holdings' bullish Insider profile, click here.

An Intriguing Change of Heart

This wireless play will demand some patience, but take heed of this telling insiders' reversal.

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