Lower Revenues And High Debt Will Crush Latin America Margins

Key Takeaways

• Ongoing customer migration to streaming and demographic shifts are eroding Liberty Latin America's traditional revenue streams and restricting future subscriber growth.
  
• High debt, heavy competition, and large capital needs are constraining investment, compressing margins, and threatening long-term earnings and cash flow.
  
• Growth in high-value subscribers, network modernization, and operational efficiencies are boosting revenues, margins, and free cash flow, while restructuring actions enhance financial flexibility and shareholder returns.

Catalysts

Provides fixed, mobile, and subsea telecommunications services in Puerto Rico, Panama, Costa Rica, Jamaica, Latin America and the Caribbean, the Bahamas, Trinidad and Tobago, Barbados, Curacao, Chile, and internationally.

• Liberty Latin America faces sustained pressure on its video, broadband, and fixed line revenues as consumers in its core markets accelerate the abandonment of traditional cable services in favor of over-the-top and streaming alternatives, leading to declining ARPU and net subscriber losses in key segments and ultimately driving long-term deterioration in both revenue and profit margins.
  
• Ongoing demographic headwinds from slower population growth and increased urban migration in Latin America will limit the company's future addressable market, constraining organic subscriber growth and dampening the company's ability to achieve structural ARPU uplift, which will weigh on long-term top-line expansion.
  
• The company's high leverage and rising interest expense-highlighted by Liberty Puerto Rico's unsustainable seven-point-nine times covenant leverage and pending large maturities-will severely constrain investment in growth initiatives and erode net earnings, ultimately pressuring free cash flow and the ability to return capital to shareholders.
  
• Intensifying price competition from existing rivals and low-cost digital-only entrants is driving ARPU and margin compression, as Liberty Latin America is forced to lower prices or increase retention discounts to defend market share, which has already manifested in sequential fixed ARPU declines and is likely to result in further EBITDA margin contraction across its portfolio.
  
• Large, recurring capital expenditure requirements for next-generation network upgrades-including the costly Project MANTA subsea buildout and continued fiber and mobile enhancements-prolong payback periods and put persistent pressure on free cash flow, raising the risk that future earnings will fall short of current elevated expectations.

Liberty Latin America Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Liberty Latin America compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Liberty Latin America's revenue will grow by 1.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -26.6% today to 5.3% in 3 years time.
• The bearish analysts expect earnings to reach $249.2 million (and earnings per share of $1.32) by about September 2028, up from $-1.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 6.9x on those 2028 earnings, up from -1.4x today. This future PE is lower than the current PE for the US Telecom industry at 15.5x.
• Analysts expect the number of shares outstanding to grow by 1.73% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.1%, as per the Simply Wall St company report.

Liberty Latin America Future Earnings Per Share Growth

Risks

• Sustained growth in high-value postpaid mobile subscribers, particularly in core markets like Costa Rica, Panama, and Jamaica, as well as successful migration from prepaid to postpaid, is driving boosts in ARPU and core residential revenues, which positions the company for top-line growth and profit margin expansion.
  
• Continuous investment in next-generation fiber, DOCSIS 3.1, and network modernization (including major subsea projects like Project MANTA) is enhancing both the company's competitive edge and service quality, leading to potential market share gains and improved operational margins over the long term.
  
• Fixed-mobile convergence (FMC) strategies-demonstrated by penetration rates over 30% in several markets and new bundled, customizable offerings-are reducing churn and increasing both cross-selling opportunities and ARPU, supporting long-term revenue and margin stability.
  
• Ongoing operational efficiency improvements, including AI-driven digitization, labor force optimization, and the successful execution of cost-out initiatives, are delivering meaningful reductions in capital intensity and expanding adjusted OIBDA margins, translating to higher free cash flow and earnings.
  
• Corporate restructuring and potential separation of Puerto Rico is expected to unlock equity value, lower leverage in the main group, and provide flexibility for shareholder returns (via dividends and buybacks), while improving overall financial health and the consolidated company's ability to generate consistently strong free cash flow and net profit.

Valuation

• The assumed bearish price target for Liberty Latin America is $6.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Liberty Latin America's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $13.9, and the most bearish reporting a price target of just $6.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $4.7 billion, earnings will come to $249.2 million, and it would be trading on a PE ratio of 6.9x, assuming you use a discount rate of 11.1%.
  
• Given the current share price of $8.0, the bearish analyst price target of $6.0 is 33.3% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.