Is Liberty Latin America an Undervalued Gem in Telecom? Navigating Post-Russell Exclusion Opportunities

The exclusion of Liberty Latin America (NASDAQ: LILA, LILAK) from the Russell 2000 Value-Defensive Index in 2025 has sparked debate about whether the move reflects underlying weaknesses or presents a rare buying opportunity in the Latin American telecom sector. While the index removal likely exacerbated near-term selling pressure, the company's recent operational improvements and undervalued stock metrics suggest a compelling case for investors willing to look past short-term noise. Here's why the story is worth unpacking.

The Russell Exclusion: A Catalyst for Undervaluation?

Liberty Latin America's removal from the Russell 2000 Defensive Index—announced alongside its Q1 2025 results—likely triggered institutional outflows, given the index's role in passive fund rebalancing. While the exclusion's precise cause remains unspecified, it aligns with the company's turbulent financial history: a negative ROE of -27.22% as of 2025, compared to competitors like Liberty Global (LBTYK) at -22.30%, and lingering challenges in Puerto Rico. However, the stock's subsequent ranking as the 9th most undervalued stock in a May 2025 analysis—based on a forward P/E of 7.94 and a 47.42% upside potential—hints at a disconnect between market sentiment and fundamental recovery.

Operational Turnaround Amid Persistent Headwinds

Despite Puerto Rico's struggles, Liberty Latin America's Q1 2025 results showcased resilience in core markets. The company added 40,000 organic broadband and postpaid mobile subscribers, a 38% year-over-year surge in operating income, and an 8% rebased Adjusted OIBDA growth. Management emphasized progress in Panama, where fiber-to-the-home (FTTH) penetration rose, and the Caribbean, where its C&W unit expanded mobile broadband. These gains, paired with cost discipline, suggest a strategic pivot toward high-growth digital services—a sector where the company aims to hit 30% of sales by 2025.

Yet Puerto Rico remains a wild card. A lagging mobile turnaround forced the company to withdraw its mid-term financial outlook, underscoring execution risks. The territory's regulatory and competitive dynamics—facing rivals like AT&T (T) and Verizon (VZ)—could continue to weigh on margins unless stabilized.

Valuation: A Discounted Play on Latin American Growth?

At a P/E of 7.94 and trading 20% below analyst target prices, Liberty Latin America's valuation contrasts sharply with its 2024 overvaluation label. The stock's 34.96% year-over-year decline by early 2024, compared to the S&P 500's 10.26% rise, had already priced in much of the bad news. Analysts now highlight its $1.6 billion Adjusted OIBDA in 2024 and $1.01 Price/Book ratio—a level historically signaling undervaluation in telecom stocks—as critical supports.

Risks and Considerations

• Currency Volatility: Exposure to currencies like the Colombian peso and Costa Rican colón could amplify earnings swings.
• Infrastructure Costs: Modernizing networks in emerging markets requires sustained capital expenditure, potentially limiting near-term dividends.
• Regulatory Headwinds: Latin American governments often impose price controls or spectrum fees that can crimp profitability.

Investment Takeaways

For income-focused investors, Liberty Latin America's 3.2% dividend yield (as of Q1 2025) offers modest compensation for risk. However, the real upside lies in its geographic diversification and digital transformation narrative. The company's focus on FTTH and mobile convergence aligns with rising data demand across the region, a theme underserved by peers like Lumen Technologies (LUMN), which are retrenching in legacy markets.

While Puerto Rico's challenges warrant caution, the stock's valuation appears to reflect this risk. A buy-and-hold strategy with a 2–3-year horizon could reward investors if operational improvements in core markets offset Puerto Rican headwinds. Short-term traders might wait for clarity on regulatory outcomes in key markets before entering.

Final Verdict: Undervalued, but Not Without Hurdles

Liberty Latin America's exclusion from the Russell 2000 Defensive Index has amplified its undervalued status, but investors must distinguish between temporary setbacks and structural flaws. The company's Q1 results and strategic priorities suggest a path to recovery, even if Puerto Rico's issues linger. For those betting on Latin America's digital growth, LILA offers a discounted entry point—provided they can stomach volatility tied to its complex operating environment.

In short, Liberty Latin America is a stock for patient investors willing to bet on a turnaround in a region where telecom remains a critical infrastructure play. The Russell exclusion may have been a speed bump, but the road ahead could yet prove rewarding.