Growth and Recovery a la Mexicana

Federico is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Mexico has been going through an array of fundamental transformations, fueled by institutional and economic changes. As a matter of fact, the CAGR of its GDP per capita was 4.31% - one of the highest in Latin America – and the CAGR of private consumption between 1995 and 2011 was above 8.5%. The European crisis was not enough to pause Mexico's growth prospects: the IMF expects its GDP to grow by 3.8% in 2012 and 3.5% in 2013. All of the above, plus a tight relationship with the US economy, which is going through an accelerating recovery, makes me want to take a look at some of Mexico's biggest equities. Lets take a look and decide if we should buy or avoid three big names on the Mexican market.

FEMSA (NYSE: FMX) is the biggest Coca-Cola bottler in the world, owns a large amount of convenience stores, and 20% of beer brewer Heineken. Besides all this, it just got into the drugstore business. At a current market cap of $32.7 billion, the company trades at x25 P/E and x2 price to sales. The price seems fair for a company that, during Q3 2012, has increased net profits ($269 million) by 53.5% and grew sales by 20.3% Year over Year (YoY).

But the problems are not to be found in the numbers--the problem is strategy. Its natural for a company like FMX to intend to make acquisitions, but FMX is venturing beyond its circle of competence. Acquiring a chain of 300 drugstores is a bad signal for shareholders. When buying a consumer goods company that produces so much cash, your eyes should be on how management directs those cash flows. The dividend yield is around 1.5%, so money is not going into shareholder’s pockets. I would not buy FMX. Bad strategy can damage even great businesses.

America Movil (NYSE: AMX) is the golden goose that made Carlos Slim one of the richest men in the world. The company is Latin America's largest wireless service provider, with operations from Mexico to Argentina. Fundamentals, in opposition to its European peers, remain solid, and there is plenty of room for value added services to grow and expand ARPU (value added services are growing at 40% yearly rates). The company has high returns on invested capital (17%), EBITDA margins remain above 34%, and leverage is at a healthy x1.2 EBITDA. For a company that has a clear view on strategy, AMX is a great stable investment at x11 P/E and x5.5 EV/EBITDA, but I don’t see the price taking off until dividends start to be lifted up – today AMX pays a 1.3% dividend. Great buy and low risk, but you wont become Slim with this investment yet.

CEMEX (NYSE: CX) is the global cement manufacturer, with operations in North America, Europe, Latin America,  Africa, and Asia. As the long region list implies, CX over leveraged to make acquisitions during the real estate boom, and now its on the final steps of a painful de-leverage process. With this aim, CX recently sold 29% of its LatAm division, raising over $1.1 billion (implied valuation at x9 EV/EBITDA). This helped CX reduce its net debt to EBITDA to x5.5 from x6.0 and keep its 2014 target of x4.5. The company's exposure to markets with growth potential like the recovering US market (where CX is making 29% of its EBITDA and cement volumes are expected to grow by 13%), Asia (where cement volume growth is expected to be 12%) and the booming LatAm should give shareholders tremendous upside. The 2013 x8.5 EV/EBITDA multiple and negative net earnings for 2012 shouldn’t scare investors. This is a good bet with the right strategy at the end of an existential crisis. Risks are hig,h but potential rewards are even greater.

When going into Emerging Market (EM) equities, you need to beware of different managements and keep an eye on strategy before picking your investment. 


martinzaldua has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Cemex. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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