Are Mexican Stocks Heating Up?

The Mexican peso is down 14% against the U.S. dollar in the past year. That’s great news for Mexican exporters, and their economy, which is showing solid growth.
What’s more, the Mexican stock market, while up 7% in peso terms, is down 7% in dollar terms from a year ago. It’s trading at a trailing price/earnings ratio of 16, well below the S&P 500 index, which has a trailing P/E ratio of around 20.
Mexican stocks just may be the best value in the Americas.
Mexico was supposed to benefit hugely from the 1994 North American Free Trade Agreement (NAFTA), but this never happened. Even though parties of both major political stripes have been in power at various points since 1994, Mexican economic growth has remained very sluggish.
According to the Conference Board’s Total Economy Database, annual labor productivity growth in Mexico was only 0.9% in 1994-2013, compared to 1.7% in the U.S., 1.5% in the European Union and 1.8% in Chile. Of the major economies, only Brazil, with 0.7% annual productivity growth, has done worse during this period. Mexican total factor productivity growth has been negative since 1994.
However, since the election of President Enrique Peña Nieto in December 2012, major reforms have been carried out. Two of the most important have been in telecom and oil, where the near-monopoly of Telmex in the private telecom sector and the monopoly of Pemex in the public oil sector have been opened to competition. Auctions of some Pemex drilling licenses in shallow offshore fields are expected to be completed by the middle of this year, and despite the decline in global oil prices, there is substantial interest.
These changes have begun to speed the economy. The Economist magazine’s team of forecasters sees 2.8% growth in 2015, speeding to 3.5% in 2016. That’s not stellar by Asian standards, but it’s still higher than anywhere in the Americas except Colombia.
With the decline in the exchange rate, the big driver in Mexico is now exports of goods and services into the United States and Canada, which have been tariff-free since 1994. With the rise in Chinese wages in the last few years, Mexican labor costs have now become 20% cheaper, and this cost advantage is allowing U.S. global supply chains to be set up with a sizeable Mexican component. In terms of time zone and transportation costs, Mexico has always had advantages, of course.
The Mexican market is currently attractively priced at around 16 times historical earnings, down around 6% in dollar terms over the past year. The one caveat to this is that a few stocks in fashionable sectors have been boosted to unattractive levels by speculative U.S. money.
Fomento Economico Mexicano (NYSE: FMX), primarily a Coca-Cola (NYSE: KO) bottler, is trading at 31 times trailing earnings and 21 times prospective 2016 earnings. Media company Grupo Televisa (NYSE: TV) is trading at no less than 60 times trailing earnings and 27 times forecast 2016 earnings. In both cases, I think the valuations are rich, and there are better buys available.
Beyond the popular and overpriced favorites, there are a number of good well-priced stocks available to U.S.-based investors in Mexico. However, for an overall position in the market, the iShares Mexico Capped ETF (NYSE: EWW) tracks the MSCI Mexico Investable Market Index, which is capped so that titans like the telephone titan America Movil (NYSE: AMX) do not have more than 25% of the index.
EWW has a market capitalization of a satisfactory $1.95 billion and an expense ratio of 0.48%. Although its dividend yield of 1.2% is a little skimpy, many Mexican companies with good earnings do not pay dividends.
Beyond the index as a whole, there are a couple of Mexican stocks that sell heavily into the U.S. market, and so benefit from the decline in the peso.
Industrias Bachoco S.a.b. de C.V. (NYSE: IBA) is Mexico’s largest poultry producer, with a growing operation in the United States that represents about 20% of sales by volume, and 25% by value, with prices in the U.S. being higher than in Mexico.
Bachoco  is selling at only 10 times trailing earnings, but a somewhat less exciting 15 times expected 2015 earnings, as margins are expected to decline from their very high 2014 levels. The balance sheet is also very strong, with about $800 million in cash, while revenues in 2015 are expected to increase about 5%.
Grupo Simec S.A.B. de C.V. (NYSE: SIM) is a specialty steel producer based in Guadalajara that manufactures and distributes steel in Mexico, the U.S., Canada and other parts of the Americas. It is the largest special bar quality steel producer in North America.
Simec is currently trading at 14 times historical earnings, but only 10 times projected 2015 earnings, when sales are expected to rise about 20% and EPS is projected to grow around 30%. Like Bachoco, it has a very strong balance sheet, with about $500 million of cash and no debt. Alas, neither Bachoco nor Simec pays a dividend.
Companies manufacturing products in Mexico that are listed on U.S. stock exchanges are likely to be strengthened by the weakness of the peso. With Mexico’s likely growth in 2015 and 2016, companies like Bachoco and Simec thus represent an attractive alternative for your money, which will to some extent be sheltered from the vagaries of Wall Street.

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