A LatAm Portfolio For 2013

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Latin America (LatAm) is my region of expertise. I invest almost exclusively in LatAm, so I got to know pretty well the companies in the region. I have also hold LatAm equities for long periods of time so I always look closely at equity valuations within the region. Nowadays I find that on a price to book versus relative ROE basis LatAm has a 13% premium relative to other Emerging Markets. That said, I also recognize some opportunities in the field. Here I depict my favorite LatAm portfolio for 2013.

35% Cemex (NYSE: CX), the Mexican cement manufacturer, has been one of my top Fixed Income picks for years. The company was severely wounded by the world wide real estate bust after having been in a debt financed acquisition spree for years. Now CX is recovering and it has a lot of room to grow through its US investments thanks to the upcoming housing recovery. One of the most important developments for equity investors is that assets are no longer on fire sale. Cemex confirmed that following a successful debt refinancing and the reduced maturities it will face through year 2015, asset sales can be done in an orderly way to maximize value for shareholders. Management expects the sale of non-core assets in the US to reach $40 million in 2012 (with the potential of additional $30 million). According to management, this level of non-core asset disposal should be repeated during the next couple of years. Cemex USA’s $1.2 billion EBITDA expectation for 2016 indicates a huge upside opportunity (the company generated 29% of its 2012 $2.6 billion EBITDA in the US). CX, with operations throughout Europe, US, LatAm and Asia is trading at 2013 9x EV/EBITDA and its expecting a net profit for 2014. Its 2014 net debt is expected to be reduced to 5x times EBITDA from the current 6.2x multiple.

30% AmBev (NYSE: ABV) is not only the LatAm beverage giant controlled by AB InBev (NYSE: BUD) but also one of the most efficient cash flow machines in the world. To me, ABV is always a good long story. It’s resilient high margin business (ABVs EBIT margins are above 40%) given by its monopolistic position in markets such as Argentina (75% market share), Uruguay, Bolivia, Paraguay, or Peru (nearly 100% of market share) or even Brazil (70% market share) makes it a stable cash cow. Growing top line sales at a rate of almost 20%, I think ABVs 25x 2013 P/E is justified.

35% Ternium (NYSE: TX) is one my favorite steel companies in the world. TX has a great portfolio in Mexico, a new investment in Brazil (TX along with Tenaris recently bough 27.7% of Brazilian Steel giant Usiminas), and a monopoly in Argentina through its subsidiary Siderar. Besides, TX management is prudent and cost efficient. TX multiples are not discounting its growth potential in Brazil nor its income stability in Argentina. TX trades at 2013 7x P/E and 3.7x EV/EBITDA. The stock was up by 28.8% in 2012 and I think of it as a long term opportunity. Its $4.6 billion market capitalization (net debt stands at $1.9 billion) makes TX an M&A target if the steel consolidation process gets to restart at some point in time.

Given the current valuation premium that the market is giving LatAm over other Emerging Markets, I think this is a great growth portfolio to own if you want LatAm exposure. I gave ABV a lower weight given its lower upside from current valuation levels. This portfolio would be paying you a small but growing cash dividend yield (expected at 2.2% for 2013) and offering huge upside potential through TX and CX. For now, just buy and hold.


martinzaldua has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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