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Alan R. Goozner During the 1994 Peso crisis, I started an e-mail newsletter. This followed from my comments to Mexican interest groups and list servers on the rapidly expanding Internet. The newsletter became a copyright publication : "The Mexican Commentary." This had a limited paid subscriber... More
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  • GMK - Gruma ADRs What to Expect After the Refinance News 5 comments
    Sep 24, 2009 9:12 AM

    GMK sold off on the "good" news as expected.  Traders well anticipated the financing announcement and the terms are within the range of expectation.  In fact, the terms are better than I expected.   But traders had it in their plans to sell on the news to take profits and we have had a great run from its March 6-9 low of $.92 on the ADRs.

    I still have to work out the cash flow and implications to the bottom line but the overall development is highly favorable.

    But what now to expect in the stock price?

    Looking at Cemex's trading pattern may give a clue.  During the period of its refinance announcement traders anticipation on August 13 peaked CX up to $11.14 for the ADRs only to see it close the next day with the official announcement at $10.76, down approximately 3%.  CX since then and only a little more than a month latter hit a recent high of $14.20, 32% higher than the post announcement low.

    If Gruma was to follow a similar pattern, it could close at $8.40 sometime before the end of October.  Banamex has set a target equivalent for the ADRs of $8.10.

    I currently hold GMK in all the accounts that I manage for my family and am currently bidding for some additional shares.

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  • MexCom
    , contributor
    Comments (3075) | Send Message
     
    Author’s reply » As predicted, it seems that Gruma (GMK on the NYSE as ADRs) is rallying after the profit taking on the "good" financing news. This rally as welcome as it may be should approached with caution. The volume is very weak but the advance is under pressure from an overall weak stock market. I believe the immediate good news selling from traders is just about complete. Low volume = low selling pressure seeing it reverse in price today.

     

    I did pick some up on the dip and currently hold a full position.

     

    Now I am simply going to hold until it reaches over the $8 some time next month. There will be some bumps and grinds along the way to give some opportunity for those who want to cost average up.
    25 Sep 2009, 01:21 PM Reply Like
  • LadaNiva
    , contributor
    Comments (4) | Send Message
     
    Just curious how you are valuing GMK since you say you'll get out at $8.00.
    If you're primarily an in-and-out trader, then I suppose this makes sense. However, unless I'm missing something, I have a much higher price target so would like your views.

     

    The major positives I see are:

     

    1. Aside from a dissasterous 2008 due to the stupid derivatives gamble, GMK's core business seems pretty sound and growing.

     

    2. Potential for expansion (particularly in Asia and Europe where there are few competitors for their products) gives GMK signficant upside over the next several years.

     

    3. Effect of interest expense on the derivative debt shouldn't be a major drag on earnings (significant yes, but not unmanagable). I'm estimating 2010 to be in the $1.25 - $1.40 range even after the increased interest expense.

     

    4. Tortillas have two major advantages over traditional bread "buns" for retail fast food sandwich chains in that they take up significantly less shelf space and have a significantly longer life. "Wraps" are really catching on and are now being offered in virtually all the major fast food chains. Now that these are catching on in the retail chains, people will start making more and more "wraps" at home

     

    I'm a long term holder of GMK and think this is one of the most undervalued stocks I can find. Just curious if you have a longer term outlook (5-10 years) and would appreciate your views of their expansion prospects. Although they obviously will be more limited in this aspect due to the derivative debt, they still have more than adequate cash flow to finance some level of capital investments.
    26 Sep 2009, 06:43 AM Reply Like
  • MexCom
    , contributor
    Comments (3075) | Send Message
     
    Author’s reply » Your comments are most welcome.

     

    I too am (in spirit) a long-term holder of GMK. This comes from my general interest in Mexico, the economy, agriculture (the corn crop), oil exploration in the Gulf (maybe 10 years to come on line) and all the reasons you cite.

     

    If the price will be 8+ within a month, its only prudent to take some profits. I have to do so to limit my risk.

     

    Compared to the other investments in my portfolios, GMK I consider to be among the most speculative. It pays no dividend at present, Mexico continues to have inflation in excess of the US with the peso constantly devaluing along with the ongoing general perception of lawlessness surrounding the violence associated with the illegal drug trade.

     

    GMK is a great company but just had a stumble in the financial market crash.

     

    They are going to survive but to what extent I want to risk the quick profits that about to occur - it is only rational to spend some of it.

     

    28 Sep 2009, 06:31 PM Reply Like
  • LadaNiva
    , contributor
    Comments (4) | Send Message
     
    Thanks for your perspective. However, I'm a little more optimistic about GMK's potential and don't see it as all that speculative, at least at the current price, given it's historical core earnings and revenue trends. While the negatives you mention about Mexico are very real, I seem to recall GMK now has less than 30% of its sales from Mexican operations so this has become less of an issue as it expands internationally. This ratio should continue to shrink going forward if they continue executing their business plan.

     

    As far as taking money off the table, I also have a somewhat different perspective. This makes sense when a company becomes "fairly valued" and the money can be invested in something else with a better risk/reward profile. In the case of GMK, which was driven down from $15 to $1 from the "one-off") derivatives losses and fear of bankruptcy, the current price still only reflects a P/E of about 5 based on my estimated earnings for 2010, even with the increased interest expense on the derivative debt.

     

    Ignoring any future expansion potential, I think GMK's current fair value is closer to $12 or $13. At that point, I may consider taking some profit since I could probably then find other investments with a better risk/reward. At $8, I think GMK would still be undervalued by at least 50% and won't sell at that price unless I can find another company which I believe is more undervalued. The fact I got in at around $2 and have a nice profit is totally irrelevant they way I look at investing. To me, the only relevant issues are 1) what do I believe the stock is worth today; and 2) can I find a better investment if I sell? If you sell at $8 and put the money in something else with a lower risk/reward ratio, have you really reduced your risk? Of course, if an investment in any one company becomes a significant portion of an investor's portfolio, then it may make sense to reduce the holding. However, on the other hand, too much diversification also results in only average returns.

     

    Anyway, different viewpoints are what makes the market interesting so best of luck to you in the future.

     

    On Sep 28 06:31 PM MexCom wrote:

     

    > Your comments are most welcome.
    >
    > I too am (in spirit) a long-term holder of GMK. This comes from my
    > general interest in Mexico, the economy, agriculture (the corn crop),
    > oil exploration in the Gulf (maybe 10 years to come on line) and
    > all the reasons you cite.
    >
    > If the price will be 8+ within a month, its only prudent to take
    > some profits. I have to do so to limit my risk.
    >
    > Compared to the other investments in my portfolios, GMK I consider
    > to be among the most speculative. It pays no dividend at present,
    > Mexico continues to have inflation in excess of the US with the peso
    > constantly devaluing along with the ongoing general perception of
    > lawlessness surrounding the violence associated with the illegal
    > drug trade.
    >
    > GMK is a great company but just had a stumble in the financial market
    > crash.
    >
    > They are going to survive but to what extent I want to risk the quick
    > profits that about to occur - it is only rational to spend some of
    > it.
    >
    29 Sep 2009, 08:04 AM Reply Like
  • MexCom
    , contributor
    Comments (3075) | Send Message
     
    Author’s reply » Nice rise today closing just below $7 for the ADRs. This makes it a two day advance of 15% since the low reached after my September 24 post. Profit taking into the close on Friday was the best opportunity to pick up some shares.

     

    I bought today's close at the market seeing the momentum on the Bolsa with the heavy volume. The blocks going on the NYSE were larger than normal. This baby has a long way to go. As much as we have already made half my expected short-term rise in the stock, it seems that my valuation may be too conservative.

     

    29 Sep 2009, 05:30 PM Reply Like
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