The Johnny Depp of Closed-End Funds Talks CUBA (part 6)
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[Continued from part 5]
Slepko: How do politics figure into your Cuba outlook?
Herzfeld: Well, I believe if President Obama is re-elected, then whatever chances there are of the embargo being lifted are better than if Governor Romney wins. Others seem to agree with that assessment. I noticed our stock had a few upticks recently when the polls tilted towards President Obama.
Slepko: Also, if Obama wins Florida it will probably be without the majority of the Cuban-American vote, which should put a stake through the heart of the assumption that Cubans are key to statewide victory. Of course Obama’s positions are always “evolving” so you never know…What’s the mood of Cubans currently on the embargo?
Herzfeld: Many of the Cuban exiles that are hardline on the embargo have begun to soften their position, and their children are even less bitter…Also, if Fidel passes away, I think you’ll see a change in Raul Castro’s position. Additionally, I think how the Alan Gross case is playing out is worth watching if you want to stay on top of US-Cuba relations.
Slepko: Which companies have been the most open about their plans for Cuba?
Herzfeld: None. None – except Watsco (NYSE: WSO). They have been the most forthcoming. Watsco is one of our largest holdings, and though they aren’t in Cuba now, they plan to be a very large player in Cuba. They’re the largest air conditioning wholesaler and distributor and based in Florida, and they have said they expect to sell a lot in Cuba. Their joint venture in Latin America with Carrier [a unit of United Technologies (NYSE UTX)] is significant.
Slepko: Aside from the Fund’s recent small investments in private in-country ventures you mentioned, are there any public companies included in the Fund’s holdings that are active in Cuba at the moment?
Herzfeld: You have to look at many of the Mexican and other Latin American companies. In addition to Copa which I mentioned before, one of the telephone companies in Mexico does business there [American Movil (NYSE: AMX)(NASDAQ AMOV)], and there is of course Coca-Cola FEMSA (NYSE KOF) which appears to be active in Cuba. They are now the largest Coca-Cola franchise bottler in the world and have recently merged their operations with Grupo Fomento Queretano’s beverage operation. I originally considered them because one day I was at my marina and met a visitor from Mexico. He told me that he had been negotiating the rights for a major beer company for distribution in Cuba. I thought to myself, “Is this man with FEMSA?” but I never found out. FEMSA Comercio is the largest single customer of FEMSA Cerveza and of the Coca-Cola system in Mexico.
In addition to its Coke activities, Fomento Economico Mexicano (NYSE: FMX) has three main businesses that are doing well, and because they are a Mexican company, I see them as having the ability to be active in Cuba.
Slepko: It seems knowing about how certain companies like the FEMSA network are successful in negotiating certain aspects of their business in Cuba has served you well…A lot of the Fund’s holdings are based upon your gut as well as what you hear around the community, yes?
Herzfeld: It’s not a gut feeling, more of an educated analysis and an understanding of how these companies operate and their abilities to expand into Cuba. But a lot of the companies won’t talk directly to me (or anybody) about Cuba. Some of the new names in our portfolio are Martin Marietta Materials (NYSE MLM) and Vulcan Materials (NYSE VMC). We think companies in the aggregates business are going to have plenty of opportunity in and with Cuba…Cemex (NYSE: CX) falls into the same category. Cemex has been taking on various leadership positions in the industry. They’ve developed a new prefabricated concrete solution in Europe which shows much promise for additional growth, and announced the launch of Fortium ICF in the United States. The product is a new construction material specifically engineered to reduce the time and material needed to build vertical concrete wall systems while providing substantial savings in long term maintenance and energy costs.
[Continued in part 7]
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