As I explained in last week's report, the economy of Mexico is setting up strongly for high growth over the next decade. Our outlook is bullish for the Mexican stocks due to the country's prospects and the large amount of entrenched monopolies that make local companies highly profitable.
We are long Mexico via the iShares ETF (NYSEARCA:EWW), but also have been researching individual stocks in the country that stand out. Not all of these are ready to buy at current prices, but the outlook for these companies is strong due to dominant market shares within stable but growing industries in Mexico. We excluded telecom companies from this list due to current de-regulation in Mexico which would eliminate the current leaders' advantages. Below is a list of quick notes on each company and what the buying proposition is for each one.
Grupo Carso (GCARSOA1:MEX): Grupo Carosa is the only major Mexican company with a current return on investment capital of above 25%. It is a conglomerate of Carlos Slim's non-telecom business that consist of retailers, construction, and heavy industry companies. The most notable assets within the company are Grupo Sanborns (Mexican version of Walgreens with an in house restaurant), semiconductor producer Condumex, and several construction firms. Due to the splitting off of telecom assets in 1996, Grupo Carso is not affected by the deregulation of the telecom industry. However, further reforms to open up more local industries to competition would hurt this company's stock. Sales slowed down in 2013, but the company still was highly profitable with a 17.4% profit margin while having only a 0.11 debt to equity ratio.
Gruma (GMK): Gruma is the world's largest producer or tortillas and flatbreads for wraps. They own the two largest brands of torillias in North America (Mission and Guerrero), and have been able to penetrate grocery stores in Europe and Asia by branding their products as wraps instead of tortillas. Gruma's earnings are growing at a rate of 34.4% per year since 2009, and expected to grow 43% over the next five years. The catalysts for this growth are international expansion and the increased popularity of Mexican food outside of Mexico and the Southwestern United States. Risks of Gruma include low barriers to entry for competition, and high debt levels (D/E ratio > 1).
Grupo Elecktra (MX:ELECKTRA): Grupo Elecktra is a retailer and consumer credit financing company for the purchase of appliances for low to middle income families in Mexico. They charge 50-120% annualized interest rates and have a default rate of just 1%. This practice would be considered illegal and usurious in the US, but in Mexico it has created one of Mexico's most profitable financial institutions. The stock is down 73% from 2012 highs which is creating a value opportunity from disappointing 2013 sales.
Coca Cola FEMSA (NYSE:KOF): FEMSA is the bottling and distribution plant for Coca Cola in Mexico, Central America, and South America. They are highly profitable. Technically, the stock just broke out of a eight month downward channel dating back to August 2013. However, we prefer Brazil based Ambev (NYSE:ABEV) over KOF because of its combination of distribution rights of Pepsi and its dominance in the South American beer market. Ambev also has maintained stronger financial performance including higher operating margins without any debt.
Grupo Aeroportuario Del Sureste (NYSE:ASR): This company nine of the major airports in southern and eastern Mexico. Their properties include the airports of popular vacation spots such as Cancun, Huatulco, and Cozumel and business hub Veracruz. With the declining fear of the drug cartels, Mexican tourism from the US will likely rebound along with increased domestic vacationers. ASR has had strong financial performance as well with a trailing twelve month 44.7% net profit margin.
Grupo Televisa (NYSE:TV): Grupo Televisa is the dominant leader in television programming in Mexico. They control 70% of prime time airwaves in Mexico and are the leading producer of Spanish language television in the United States. Growth potential is high due to potential expansion in the English speaking television market and the fact that more Mexicans rising out of poverty will be able to afford to buy TV's and products advertised on TV. Increased consumer spending will allow Grupo Televisa to charge more for ad space. The main downside risk for TV is its unfavorable valuation.
Disclosure: The author is long EWW. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.