Invest in Mexican stocks part 4: Why not buy the exchange

Buying the exchange might be a good option if you like a stock market. Mexican cement, the worlds largest bakery, resorts & investing in supermarkets.

A new part of my series on Mexican stocks. With this time a record 50% hit rate of interesting companies.

1. Bimbo: Largest bakery company in the world. Active in 35 countries with 100+ brands and over 9,000 products. 48% from North America, 33% from Mexico, 10% from EAA (Europe, Africa, Asia), and 9% from South America.
   Market cap of 295B pesos and 104B pesos of net debt. Company talks about EBITDA, but I do not see a capital light business and a lack of free cash flow. Not certain about the big advantages to scale eighter. A price earnings ratio of 21.7 and a meager 1.4% dividend yield do not get me interested.

   

2. Bolsa Mexicana de Valores: Mexican stock exchange. I like the stock exchange business. It is quite capital light, earnings can grow with the market and there is usually capital left for decent dividends.
   Results in the last couple of quarters have not been great (EPS -9%), but long term I think this is a decent business that can benefit from Mexican growth.
   Market cap of 18B pesos with 4B pesos in net cash & investments. Price earnings ratio of 12.4 is not very demanding. Dividend is a nice 6% plus Bolsa bought back share for 296M pesos in 2023. Ian did a good writeup on Bolsa recently. Interesting company.

3. Cadu: Construction company focusing on (entry level) housing.
   Market cap 1.25B pesos and 1.57B in net debt. price earnings ratio looks attractive at 4.3, net assets is also 5.4B pesos. So you can get assets at a discount. Long-term performance is poor and true value of the assets might be questionable. Quality of earnings at construction companies is also notoriously volatile. For details on Mexican construction. You should read my discussion of Consorcio Ara in part 2 of my Mexico series. I liked that company better due to its fortress balance sheet and hidden value in owned shopping centers.
   

4. Cemex is the largest Mexican Cement and aggregates company with activities in over 50 countries. Market cap $9.8B. $6.9B in net debt. 2023 was a great year with $1.2B in FCF. $3.3B in EBITDA. Q1 2024 was also decent with another 5% increase in EBITDA with strong performance in Mexico.

   

   Sales seem to be relatively evenly spread out. This however is not the case for EBITDA. EBITDA comes from Mexico: $1,488M (41.0%), US $1,040M (28.7%), EMEA $703M (19.49%), and SCAC $399M (11.0%).

   

   Regions however is not the only thing to look at. Within the industry there is a difference in products. Cemex is heavily focused on Cement and Ready-Mix. With Aggregates only 14% of sales.

   

   The great thing of Cement and aggregates is their low value to weight ratio. This means the market usually consists of regional monopolies with good returns. This effect is even stronger if the region is not easy to travers over water (which lowers transportation cost).

   The end markets for these products are heavily cyclical. Given their lower operating cost and infinite shelf-life aggregates focused companies tend to perform best in a scenario with low demand.

   The company benefits from the reshoring tailwind. In the US and Mexico there are a lot of investments made to relocate factories away from China. Wintergem wrote a great review of US aggregate producers. He discussed this theme in more detail in relation to aggregate market. He did however exclude Cemex because less then 50% of sales come from the USA/CAN.
   
   I would argue Mexico is benefitting from exactly the same trend. Together Mexico and USA make up 61% of sales and 69.7% of EBITDA for Cemex.

   
   If an investor is confident that reshoring will accelerate into the future than investing in Cemex might be a good idea. The company is well positioned to benefit from additional activity. The stock recently dropped significant after the Mexican elections. This could be a good entry point for investors who want to have exposure to higher construction activity.
   
   The risk however is that this industry is cyclical. Significant debt, less focus on aggregates and exposure to Mexico, still an emerging market, makes Cemex less ideal when the market turns.

   
   Net debt however has steadily decreased and operational performance improved. An additional benefit of Cemex is that it can benefit from a recovery in its relatively low margin EMEA business.
   

5. Grupo Comercial Chedraui SAB de CV: Mexican supermarket chain with stores in the US. Market cap 121.88B pesos. Net cash of 2.4B pesos. Results and share price follow a consistent upward trend with Same-store-sales in Mexico exceeding the Mexican average for 15 straight quarters. A sign the company is taking market share. Chedraui saw a muted 1.4% revenue increase in 2023 to 263.1B. This was partly caused by currency effects. Gross profit increased 3.3%. This combined with flat operating expenses and paying down debt led a 27.8% increase in net income to 7.894M pesos.
   

   Sales are divided roughly equal between the US and Mexico.
   The US operations come for 55% from the Smart & Final acquisition in 2021 from Apollo, which more than doubled the operations in the US. This acquisition was a good deal. Given the $363.7M of EBITDA in 2023 for a total acquisition price of $620M. The US operations felt some currency headwinds in 2023, but the recent drop in the peso will make this a significant tailwind.
   
   The investment fits well within the theme of investing in Mexico. I’m surprised at their operating performance. In addition, I find the valuation at 15 times earnings reasonable compared to the 20.5 for WalMex. Especially given the well-performing US operation. It is not super bargain level territory though. Supermarkets are also a stable business with thin, but consistent margins. The only risk I see is that you have a market cap of 121.88B with 36.3B in tangible assets. If performance deteriorates investors have little hard assets to fall back on.
   

6. Grupe SAB de CV: El Cid resorts is active in the hospitality industry.

   Market cap 2.35B pesos and 1.4B net debt and 5.2B in net tangible book value. The Company's activities are divided into four business segments: Hotel Services, Timeshare, Real Estate and Clubs. This is a capital-intensive business focused on tourism. 26 times earnings seems very expensive to me. Results during covid was what you expect. Hospitality businesses rely heavily on cheap labor. With wages going up this business will not get any easier. If you are looking for an asset play I would prefer something less cyclical, with less headwind and with higher earnings.

Conclusion:

Looking at the next 6 companies got some interesting results. 3 out of 6 are worthy of further research. The exchange is not a surprise to me. It has been written up quite a bit and stays an interesting opportunity. Especially shocks like the recent election are usually decent times to buy. Cemex and Chedraui (supermarket) are both surprisingly good. Cemex fits well with the theme of Mexican growth and the valuation is not demanding. Question remains if you are not buying close to peak earnings. Chedraui the supermarket is the biggest surprise. Good historic performance, reasonable valuation and benefits from persistent trends.

Disclaimer: These are my ideas and not personal investment advice. I might own shares discussed and can sell those shares at all times. I don’t know your financial situation. Do your due diligence and do not blindly follow an article on the internet.