With Trump president of the US, some things might have changed. I however still plan to continue my series covering all Mexican stocks.
It is unclear what Trump’s impact will be. In the first term of Trump’s presidency, trade between Mexico and the US kept increasing. Tariffs are now 25% but it is unclear to me if they would stay there, go down, or dare I say it: go up further. It is a risky situation. I prefer to have stocks that can handle uncertainty.
In part 13 of my all-Mexican stocks series I will discuss the third of the 3 Mexican airports and will finish with my second Mexican holding: Promotora y Operadora de Infraestructura.
All Mexican stocks part 13
1. Nemak
Nemak is a global manufacturer of car parts. The company specialises in lightweight solutions. Manufacturer of car parts already makes me quite negative about Nemak. The company has a market cap of 7.03B Ps and 34.2B Ps in net debt. The equity in Nemak stands at 36.2B Ps and tangible equity at 26.0B Ps. I like that you can buy 26B Ps of tangible equity for 7.0B Ps. At 7 times earnings the stock looks optically cheap from an earnings perspective as well.
At 2.9 times EBITDA debt is on the high side but not a deal breaker.
My major issue with the company is its cash flow. from 2020 till 2023 the company generated a cumulative net operating cash flow of 28.9B Ps but invested 29.3 in capital expenditures. All these investments did not lead to an upward trend in cash flow. With 2023 being the worst year of them all with 5.3B Ps in net operating Cash flow and 9.6B in capital expenditures.
The market is also clearly not liking all the investments that they are making. With all the changes happening in car manufacturing the risk of stranded assets is quite high in my opinion.
Looking at both earnings and equity Nemak is a very cheap stock. The company however is operating in a cyclical industry. I do not like the investments that they have been making and see a clear risk of lower future earnings and stranded assets. This in combination with a lack of free cash flow makes that I’m not really interested in Nemak.
2. Grupo Aeroportuario Centro Norte (OMA)
Airports are a good business. Mexican airports are better than average airports given the favorable long term contracts with the Mexican government and tailwinds from a richer Mexican population. In addition OMA in particular benefits from nearshoring.
There are two other listed Mexican airport stocks:
Grupo Aeroportuario del Sureste (ASUR) covered in this article:
Grupo Aeroportuario del Pacífico (GAP) covered here:
In the linked article above I go into more detail about the return allowance for all the Mexican airports. If you think about investing in Mexican airports please read it.
OMA is focused on northern Mexico which is most closely connected with the nearshoring theme. In addition to airports OMA also owns two hotels at airports and some industrial assets.
Grupo Aeroportuario Centro Norte is listed in Mexico and the US and has a market cap of 71.7B Ps. Net debt is 8.5B Ps and net debt to EBITDA is low at 1.0. OMA is investing in expansion as well but does deliver growth. In addition to growth the company pays out an attractive dividend of 5.9%.
Vinci Airports holds 30% of the shares. They like their dividends so the payout ratio will likely stay high.
The only downside is that you pay 71.7B Ps for only 9.2B Ps in equity. This means that there is a consistent risk that the Mexican government will make your investment less lucrative. The good thing is that due to its high returns on capital the company can both grow and pay out a high dividend at the same time. Personally, I think earnings growth going forward will be lower than revenue growth. Returns on capital cannot increase much further without attracting too much regulatory attention. The stock can still be a good deal in such an environment though.
All Mexican airports have very similar risks and opportunities. There are some differences though.
OMA has some nice industrial assets and most exposed to nearshoring and the richer northern part of Mexico. Debt is low and valuation of 16 times earnings is quite reasonable.
Grupo Aeroportuario del Pacífico is the largest of the Mexican airport operators and focuses mostly on central Mexico. The stock is the most expensive of the 3 and slightly more leveraged. At this moment I prefer OMA.
Grupo Aeroportuario del Sureste is the cheapest of them all. It also has a stronger balance sheet with a net cash position. It has some nice growth opportunities in Colombia as well. Downside is that Cancun is a major part of their business. The prospects for Cancun are not as good as for other Mexican airports. That being said the lower valuation at 13.5 times earnings and net cash position are attractive.
Conclusion: Mexican airports are an interesting option for investors who like a nice dividend and some growth. Be aware that growth in earnings might not keep up with revenue growth due to mandated lower rates.
3. Orbia
Orbia Advance Corp. SAB de CV formerly known as Mexichem engages in the manufacture and sale of petrochemical products. The company is quite diversified with 39% of revenue from North America, 30% from Europe and 19% from South America. Their primary products polymers & PVC sound like competitive commodities.
The market cap is 26.9B & Net debt is 96B Ps. This already looks dangerously high to me. Net debt has been increasing and earnings are currently in decline. Leading to a high net debt to EBITDA ratio of 3.36.
Given the operational issues and the high debt load it is not surprising that the share price is steadily declining. This company is not really in a position to keep paying the dividend. there might be opportunities in the chemical industry but Orbia is something I’m not interested in.
4. Industrias Penoles
Large miner of Silver (32%) & gold (28%) in Mexico. The company has a market cap of 119B Ps. Equity is 115B Ps. The company has difficulty generating significant profits from its mines, resulting in a price-earnings ratio of 69. The higher prices for both Silver & Gold should be positive for Penoles.
Industrias Penoles is controlled by Grupo Bal. Other parts of the Grupo Bal imperium like the insurance and retail business are discussed in the article linked below:
Not a big fan of holding shares in a mining company controlled by a conglomerate.
The share price surged after covid, but has declined 24% since August 2020.
Penoles compares unfavorably in my view to Grupo Mexico which gives you exposure to Southern Copper at a significant discount. More on Grupo Mexico below:
5. Promotora y Operadora de Infraestructura (PINFRA / PINFRAL)
I built a position in PINFRAL shares in 2024 with an average price of 132.35 Ps.
PINFRA focuses on the construction, operation, maintenance, financing and promotion of toll roads and port projects, as well as the production of asphalt mixes.
The largest segment are the toll road concessions which represent 77% of revenue. The Altamira port is 8% and construction at 13% is focused on creating new toll roads.
The market cap of PINFRA is 83B Ps. Equity is 63.9B Ps. The balance sheet is a fortress with 18.2B Ps. in cash and short-term investments versus 4.9B Ps. in bank credits and 7.8B Ps. in collection rights.
Pinfra is showing consistent growth in revenues and profits. Revenue increased from 11.9B Ps in 2019 to 15.5B Ps in 2023. Earnings in this timeframe increased from 4.6B Ps to 6.0B Ps. 2020 was naturally not a great year with a decline in revenue to 9.9B Ps and a profit of 2.7B Ps.
2024 was also a good year with earnings increasing. The most recent Q3 results showed a 14% in net income to 2.3B Ps. Going forward I expect PINFRA to increase its profits. Not only due to price escalation and higher usage but also due to new projects. Currently PINFRA is working on:
the Pátzcuaro-Uruapan Expansion from 2 to 4 lanes. Total cost 1.2B Ps
the Uruapan Nueva Italia Expansion. Total cost 6.5B Ps.
the Rumbo Nuevo toll road extending for 37km. Total cost 1.45B expected to be finished January 2025.
the Armería-Manzanillo Expansion from 4 to 6 lanes over 46km. Total cost estimated to be 4B Ps and expected to be finished by June 2025 .
The shares are currently trading at 10 times earnings. This is quite cheap in my opinion for a very stable toll road operation with a net cash position and good growth prospects. PINFRA clearly can benefit from a lower rate environment in Mexico which would help the company re-rate to a more attractive multiple of earnings.
The stock price has done ok in recent years. Still, it is quite surprising to me that the company is still below its pre-covid high. Especially given the positive trajectory in earnings.
For value investors there is an attractive opportunity in the PINFRAL shares. These shares are very similar to PINFRA share but do not have voting rights and represent 12% of the shares outstanding. These shares were once created to let David Peñaloza Alanís keep control. Currently he owns 50.4% of all shares so this structure is not adding much value at the moment.
PINFRA does not pay out all earnings as dividends. This is fine by me given the good growth prospects the company has. A little lower net cash balance would not hurt but given the high interest rates in Mexico the cash balance does not hurt that much.
PINFRAL shares on the moment of writing yield 3.4%. This is not a pure dividend play but 3.4% is decent given the growth prospects.
Conclusion
Times of stress create change. Mexican stocks have been quite attractive for a while. The tariffs will change a lot but many Mexican companies are positioned well to deal with it. I hope to keep my PINFRAL shares for a long time. Not too worried about the new tariffs. People will be driving cars for quite some time to come. For other interesting Mexican stocks please look at my other articles.
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.
Where do you think Nemak's current earnings are? Cyclically low or high?