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Alsea: Domino's And Starbucks Of Mexico Is A Strong Buy

Mar. 02, 2021 8:00 AM ETAlsea, S.A.B. de C.V. (ALSSF)DPZ, SBUX45 Comments


  • Alsea's dominant restaurant franchise operator is still selling at a massive Covid-19 discount.
  • American restaurant chains of much lower-quality brands have regained all their Covid losses already.
  • Alsea stock would nearly double just to get back to where it was pre-pandemic and would triple to get back to its all-time highs.
  • The company's balance sheet is strong enough to survive, and the company's long-term prospects remain excellent.
  • I do much more than just articles at Ian's Insider Corner: Members get access to model portfolios, regular updates, a chat room, and more. Get started today »

Alsea (OTCPK:ALSSF) (Mexico: ALSEA) is Mexico's largest franchise chain. It operates Domino's (DPZ) and Starbucks (SBUX) in Mexico along with numerous other restaurant chains. It also has extensive operations elsewhere in the Spanish-speaking world. The U.S. ADR is very illiquid, I own the ALSEA shares listed in Mexico personally. If you do want the U.S. option, set a limit order for the current share price (25.5 Pesos) divided by the current Peso/Dollar exchange rate (20.8 as of this writing) leading to a fair price of $1.23 per share of ALSSF stock.

Historically the stock has been highly successful, rising from less than 2 Pesos per share 20 years ago to as much as 75 Pesos recently:

Source: Google

With Covid, however, the stock tanked from 55 Pesos down to around 15, and it's only back up to 25 now. That's in stark contrast to American sit-down restaurant chains:

Brinker aka Chili's is actually up 91% over the past year, while others such as Red Robin and Dine Brands aka Applebee's are around flat. Even Dave & Buster's, which is worst positioned of all for Covid with its video arcade concept, is actually up year-over-year. The Starbucks and Domino's of Mexico, however, is still down 46%.

Here's another way to look at it:

Over the past year, Domino's originally rose and is now around flat. Starbucks is actually up big.

Those are Alsea's leading brands. Yet its own stock is down 46%. Sure, the franchisee takes more risk of the two, but in a pandemic, demand for pizza is going to be good. Let's not get ahead of the story though. What's Alsea, and is there any reason for such a deep discount on the stock.

Alsea: A Diversified Restaurant Empire

Q3 2020 investor presentation

This is an Ian's Insider Corner report published in January for our service's subscribers. It has been updated for subsequent events.

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This article was written by

Ian Bezek profile picture

Ian Bezek is a former hedge fund analyst at Kerrisdale Capital. He has spent the decade living in Latin America, doing the boots-on-the ground research for investors interested in markets such as Mexico, Colombia, and Chile. He also specializes in high-quality compounders and growth stocks at reasonable prices in the US and other developed markets.

Ian leads the investing group Learn more .

Analyst’s Disclosure: I am/we are long ALSSF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I own Alsea shares listed on the Mexican stock exchange.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (45)

PaulInNY profile picture
This has been a nice pick from you! Any change in sentiment or thoughts on an exit strategy?
Ian Bezek profile picture
@PaulInNY It's not extremely undervalued anymore but it's still attractive compared to where U.S. and European restaurant stocks are trading. And it's still down close to 50% from its 2018-19 levels. I expect it to ultimately make new all-time highs, though that's more of a steady growth trade than simply playing Covid recovery.
PaulInNY profile picture
@Ian Bezek I have yet to see your marketplace, Ian's Insider Corner. Do you update and give your thoughts on exit strategies, such as ALSSF, there?
@Ian Bezek Yes and those highs are without the Europe Starbucks acquisitions. Those highs shouldn’t be the new highs anymore. Europe starbucks acquisitions weren’t able to consolidate as COVID hit, also because of COVID they are operating more efficient and have better margins as pre-covid. new highs should be in the horizon.
Nice call Ian. Up 30% in three months. Still has 67% more upside to get back to pre-pandemic levels. I started with a small position with government money but went to a full position about a month ago after opening an IBKR account.
Ian Bezek profile picture
@trsales Thanks! I told my wife that we would buy pizza from Domino's out of our profits in Alsea stock. We can now afford a lifetime's supply of said pizza.
PaulInNY profile picture
I am curious about your opinion of the recent price decline?

The first quarter report was very good. Specially considering the graph where most of the EBITDA came from march. Looks very promising considering they still had around 10% of stores closed and some restrictions.
Projecting with march numbers net debt/EBITDA will go down to around 2.5-3X by 2021 end or biggening 2022.

Also multiples will start to look very good after the second quarter report.
Ian Bezek profile picture
@Chafro1 Yep, Alsea has strongly outperformed the market since I published this and first quarter results were strong. Nothing to worry about here.
Scarlo profile picture
Thanks, this is a very interesting recommendation.

Unfortunately, Schwab is charging $50 for the purchase on foreign shares, so I may have to pass.
@Scarlo Same for Fidelity, but the impact is pretty small when you look at the share price. I bought a speculative position recently of 2000 shares so the cost was only $.025 oer share or about 2%. If I had bought a half speculative position then it would have been $0.005 per share. If the stock were trading for $100 per share the charge would be prohibitive, but I am happily up about 15% after accounting for the charge.
You convinced me it's worth putting a little money in so I can watch it. I seem to be the only one trading this stock today, 10,002 shares traded and I bought 10000. Surprise to see the volume so low on a $1 stock. This seems like a much better reopening stock than all the US hyped reopening stocks.
Ian Bezek profile picture
@i like stats Glad you liked the article. The volume is much bigger on the Mexican listing of Alsea shares... around 2 million shares a day there so $3 million in trading volume.
@Ian Bezek Thanks that makes sense. Love stocks that are very cheap and growing revenue, I expect I will buy more once I am more comfortable.
Jay O'Brien profile picture
@Ian Bezek Strong article. I have never purchased on a foreign exchange before. I took a small position on March 2nd but with my busy schedule I couldnt spend the time to figure out how to purchase on the Mexican exchange via Fidelity. Instead, I bought the illiquid ALSSF (it traded only 3500 shares on Wednesday for example). How will the lack of liquidity impact when time comes to sell? Are there significant differences between the prices between the two exchanges?

Thanks for the insightful article!
Thanks for the interesting write up Ian. It looks like the net income margin is generally quite low, largely due to aggressive depreciation. Looking at free cashflow pre-pandemic, I'm getting a current price/FCF of ~7x. I don't have much experience with evaluating Mexican companies. Just curious as to what you think is a reasonable stabilized price/FCF once we are out of this pandemic?
Ian, thoughts/comments on the tax issue with the Mexican IRS (USD $200mm) from purchase of Vips from Walmex? And can the owner of the noncontrolling interest put it back to Alsea?
Ian Bezek profile picture
@9966921 I thought Walmex had already settled this and agreed to pay?

In any case, that transaction was from back in 2014 so even if Alsea ends up getting dinged for something, it's a very one-off expense.
@Ian Bezek Walmex settled but seems like Alsea has not but I do agree its a one-off
The Stock Stooge profile picture
Interesting company. Are their franchise licenses with Dominos and Starbucks exclusive in Mexico?
Ian Bezek profile picture
@The Stock Stooge Yes, they acquire master franchise licenses and then have the option to sub-franchise out below that, though they do in fact run the majority of their stores.
sounds too complicated
Great catch. Alsea should be 100+ in 2023. Great company with the opportunity of good perpetual growth and valued at a very low multiple!!! One the Debt/ebitda goes back to normal this stock will be a rocket!!
I like the idea Ian and wanted more exposure to Mexico and this seems like a solid idea for a very small position. I think Mexico will be a big beneficiary of the US corporate supply chain diversification away from Asia sole sourcing, and what better way to play that theme than ALSSF. Beside I have $2800 coming from the government coming, perfect for a small position.
Thanks for the heads up on this company.
Rob G. in Vegas profile picture
@trsales You mean you are going to something sensible like buying ALSSF with some of your stimulus money?

It seems that vast majority of "investors" I see on message boards plan on doing the following:

25% Food and Rent
25% Tesla
25% Bitcoin
25% Gamestop
Ian Bezek profile picture
@Rob Grande That's funny. Though, I've seen a lot of lefty folks are on rent strike now, saying landlords don't have the right to collect during a pandemic. This saves more money for chicken tendies and Bitcoin.
I have a sizable position in CAAP, a starter position in IBA, and I’m digging more deeply into Alsea. I appreciate your off-the-beaten-path analysis that’s presented in a concise and accessible way. Keep it up!
Ian Bezek profile picture
@hiztiteness Glad to hear it. CAAP has worked out nicely so far and traffic numbers are starting to turn up now. Should be a good year as long as the vaccine distribution keeps picking up speed.
@Ian Bezek CAAP has worked out incredibly well so far. Your timing was very fortuitous with the agreement extension in Argentina coming soon after! Any plans to write an update piece on CAAP/IBA?

And I forgot to mention OMAB, that’s been a big winner for me as well.
Ian Bezek profile picture
@hiztiteness I'll update on CAAP sure. Probably on IBA as well.
Interesting opportunity. If it were a bit more concentrated in Starbucks and Dominos I'd likely be all over it, but the breadth of the current portfolio gives me pause. I do not own anything in Mexico directly and this bares watching on that basis alone.
Ian Bezek profile picture
@Arimnestos That's totally fair. That said Starbucks and Domino's are two-thirds of the business. Burger King is a decent brand after that and VIPs is highly successful in Mexico (one of the country's best home-grown brands). On a side note if you're in Mexico and want authentic food at Mexican (not tourist) prices but don't want to go to a hole-in-the-wall, give VIPs a try - the quality is top-notch but it's non-pretentious diner style. We ate there at least twice a month when we lived in Mexico.

After that, it's largely prestige locations for U.S. chains such as Cheesecake Factory. Generally royalties on those are pretty good as the American operator wants a beachhead overseas (promo material: "we operate in X countries!") and gives better incentives to the franchisee to take the risk on a new brand.
@Ian Bezek VIPs is very solid quality, and they always seem busy. Its a place to go when you can't think of where to go. That they own it has piqued my interest. Thanks Ian.
Thanks Ian. I’ll take a look.
Interesting read but I worry about the currency risk. I am investing in CHF.
Ian Bezek profile picture
@The guy from Europe What aspect of currency risk specifically? If the Peso goes down, their profits will go up because they raise prices. Their debt is mostly in Pesos so their obligations inflate away if Mexico loses fiscal discipline (that said, its inflation rate has been averaging well under 5% for a long time now). They also sell a lot of food in Spain and France so their Euro revenues go up in value to them if the Peso drops.

More broadly, this quote from Terry Smith rings true:

"I would suggest looking at the matter this way: imagine we were in a discussion with some of the companies which have produced great returns for us over the last nine years, or which might do so over the next nine, and we asked them to name the top three factors in their success. What do you think the chances are that they would say “currency exposure and exchange rates”? I would suggest they might name product innovation and R&D, strong brands, control of distribution, market share, customer relationships, installed bases of equipment or software, management, successful capital expenditure and acquisitions as far more important. So, we think it’s best to ignore the Snakes and Ladders of currency movements."
@Ian Bezek I am not talking about the currency risk for the company. I am talking about currency risk Pesos / CHF. If the stock price goes up but the exchange rate down I do not make any money.

The USD is about 10% weaker compared to the CHF than a year ago. Since I invest in US corporations a 10% return was necessary to offset this currency tailwind.
@The guy from Europe In the US there are ETF's which track various currencies (FXB, FXF tracking GBP and CHF, for example) and one can hedge currency risk by writing deep-in-the-money calls on these. Does something analogous exist in Switzerland? I know FXF doesn't help you, since you'd want to *buy* calls to hedge your dollar risk, but you'd have to convert CHF to USD to do that, which would cancel the benefit of the calls.
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