Latin American ADRs

by: Tom Au, CFA

This is part of a series on ADRs (American Depositary Receipts), which will be presented by region. This post will be concerned with Latin American ADRs. Unless otherwise noted, all ADRs mentioned will be listed ADRs.

Latin American ADRs of interest to many American investors are concentrated in three general areas: Mexico, Brazil, and the southern cone of Chile, Argentina, and Peru (mainly the first country, with the other two thrown in for balance).

Mexican ADRs

Mexican ADRs fall into three groups of almost equal size. In descending order they are 1) Telecom 2) Other internationally oriented companies (which have listed ADRs) and 3) Domestically oriented companies (most of whom have no or unlisted ADRs).

The telecom sector is represented by Telmex (land line) and America Movil (NASDAQ:AMOV) (mobile phones), which was spun off from Telmex in 2001. Of the two, American Movil has been the faster growing by far, in part because it serves other Latin American markets, including Brazil, as well as Mexico. Its growth profile (and valuation) is more similar to that of a tech company like Microsoft (NASDAQ:MSFT) or Cisco Systems (NASDAQ:CSCO) than like a telecom. Telmex, on the other hand is now a classical telecom that could be called the Mexican "Baby Bell," with a yield about two percentage points lower that of America's A T& T (NYSE:T) and Verizon (NYSE:VZ), and a growth rate that may be slightly higher.

The internationally-oriented sector includes Cemex (NYSE:CX), a global cement company, with a base in Mexico, that has largely bought out U.S. and Spanish producers as well, and Femsa (NYSE:FMX), a Coca-Cola bottler that sold its beer operation to Heineken of the Netherlands in return for a 20% stake in that company. Televisa (NYSE:TV) and TV Azteca are two Mexican broadcasting companies that distribute content to Spanish-speaking audiences in the United States through Univision and Azteca America respectively. Although basically "domestic," a number of Mexican homebuilders listed in the United States in the middle of the past decade to take advantage of the interest in U.S. housing stocks during the boom. Of interest to yield-oriented investors are the Grupo Aeropuertos (airport operators) with ticker symbols like ASR and OMAB (in different parts of the country. That's because their airport concessions basically represent (growing) annuities.

Domestically oriented companies include retailers such as Wal-Mart (NYSE:WMT) de Mexico and industrial conglomerates such as Alfa and Grupo Carso (OTCPK:GPOVY) (the investment vehicle of Carlos Slim, the world's richest man, who also owns the major telecom companies). Grupo Modelo (OTC:GPMCY), the domestic beer company, also falls into this category. The major banks have been taken over by foreign concerns and delisted in the past decade.

Mexican ETFs generally try to downplay the weight of the two telecoms, while emphasizing the domestic sector to a greater extent than is true of the Bolsa as a whole.

Brazilian ADRs

The richness and variety of the Brazilian market is disguised by the fact that it has been dominated by two stocks, Petrobras (NYSE:PBR) (oil) and Vale (NYSE:RIO) (mining). At times in the past decade, the combined weight of these two stocks has exceeded 50% of the Brazilian bourse; at other times, it required just these two stocks, plus a few others in chemicals and steel to represent half the market. Arguably, one could have prospered by using these two stocks, plus Mexico's America Movil (which operates in Brazil) as a country proxy, and forgotten about the rest, over the past ten years.

Privatization has been the key to the development of the Brazilian stock market. In 1998, Telebras, then Brazil's "A T&T," did a "Baby Bell-like spinoff" of regional phone companies, most of which have listed ADRs. Since then, a number of electric utilities have gone public and listed in the U.S. Without getting bogged down in the details, it suffices to note that Brazil is of comparable size to the United States, and utilities are therefore regional, rather than national, in scope, with differing fortunes depending on the region.

Brazil's banking sector is dominated by two, Bradesco (NYSE:BBD) and Itau (which bought Unibanco). Unlike the utilities, these are national institutions, and they also have listed ADRs.

Of great interest to many investors are Brazilian issues in consumption related areas including food and beverage, media, and transportation. With a handful of exceptions such as Ambev (ABV), the beer company, they are small caps, even when listed as ADRs. They are best accessed through ETFs, rather than one by one. Some ETFs emphasize sectors like the ones discussed above, while others try to give a flavor of the whole country, while "capping" the weight of the two largest (international commodity) stocks, especially since they may not be representative of the domestic sector. Even so, the two commodity companies have great macroeconomic significance in terms of employment, trade balance contributions, etc.

Southern Cone ADRs

At the core of the southern cone markets is the Chilean market. Argentina and Peru are basically adjuncts to it. Chile is a relatively mature Latin American market that in some ways resembles that of Spain, a country not to much further on the development list. The Chilean market has few of the swings that typify other Latin markets, which is to say that it is the low risk, low reward bourse on the continent. This characteristic is exemplified by the types of stocks listed; telecom and electric utilities, beverages, and banks, with P/E ratios, dividend yields, growth, and prospective returns similar to those that might be obtained in most developed countries.

Chilean bank stocks are safer than any other in South America, arguably safer than many north of the Panama Canal, and possibly the Rio Grande. That's partly because directors can under circumstances be held personally liable for losses, and partly because some of them are subsidiaries of Spanish banks.

The most economically interesting Chilean sector is mining, which is NOT well represented in the Chilean market, because the local copper company, Codelco, is state owned. There is a minerals company, Soquimich, that produces fertilizer and lithium.

But for mining exposure, you have to go to Peru, where your choices include Southern (Peru) Copper (NYSE:SCCO), and Buenaventura (NYSE:BVN) (gold). A local bank, Creditcorp, is a higher-risk, higher-reward proposition than its Chilean counterparts. And Cementos Lima, which has a "pink sheets" ADR, is barely liquid enough for American investors.

Argentina is a larger country than Chile by most measures, but its stock market is smaller. Crises around the turn of the century crushed a number of major Argentine companies, and others were taken private. Its dominant stock, Tenaris (NYSE:TS) (oilfield services) is part of an international conglomerate based in Italy.

There are two major telcos (Telecom Argentina (NYSE:TEO) and a subsidiary of Canada's Nortel (NT) and two major banks (Banco Frances and Grupo Galicia). Some interesting "specialty holdings include IRSA (property) and Cresud (NASDAQ:CRESY), and agricultural company the value of whose land represents a large part of its market cap.

Disclosure: Long T, VZ