Mexico Industrials: Bird's-Eye View
Oligopolies, compounders, and Burry plays among 20+ industrials.
Mexico is a manufacturing power in ascent and a potential partner in the US manufacturing renaissance. A few months ago, I wrote an Intro to the Mexican Nearshoring Trend, analyzing the potential of the country’s manufacturing boom from a macro perspective. I mentioned some potentially interesting sectors to analyze but didn’t investigate specific stocks.
In this article, I continue that analysis, focusing on specific companies and stocks from the industrial sector. The list is long: large conglomerates, auto parts, chemicals, cement, steel, transportation (train, truck, and highway operators), and industrial REITs. Rather than a deep dive into each company, this is a bird's-eye view analysis, focusing on key aspects to quickly separate the interesting from the uninteresting names.
The industrial sector offers a lot of variety: some companies enjoy high margins, low competition, and monopolistic or oligopolistic markets; others are cyclical but well run and not leveraged, offering the potential to play their cycles; finally, some are badly managed or in super competitive industries, offering little returns.
Other LatAm articles
Besides Mexico Industrials, I have covered other sectors in Latin America. Check them out:
Summary
Materials
Cement manufacturers: Moctezuma, GCC, and Cemex.
The cement manufacturers enjoy very good margins and low competition because they constitute regional oligopolies. The infrastructural and housing needs of Mexico pose a good secular outlook for these companies. They trade at fair cycle-average multiples given the quality of the businesses. However, a warning is needed against excessive confidence, given the impressive boom in construction over the past two years.
Burry type chemicals: Orbia, Alpek, and Cydsa
Mexico has two multinational chemicals players (Orbia and Alpek, both in plastics) and one local player (Cydsa, in salts and fluorite). Orbia is one the largest western integrated players in the PVC supply chain (plus fluorite), whereas Alpek is important in PET for the Americas.
The three businesses are undergoing the negative portion of the cycle, mainly from excess capacity coming from China, making them a potential consideration for a Burry-type ‘roadkill-to-not-so-bad’ trade.
Steel: Industrias CH and Simec
Industrias CH is a mini-mill operator and owns the majority of Simec (which is also separately listed). The company’s market is commoditized and cyclical, but it has maintained good margins even during the negative portion of the cycle and deployed capital counter-rally.
Transportation
Train quality: Grupo Mexico Transportes
Grupo Mexico Transportes owns one of the two main train networks in Mexico, meaning a duopoly in the center and northeast, and a quasi monopoly in the northwest. Its cyclicality has been low, and it has been able to grow and deploy capital at good returns. Its parent, Grupo Mexico (more below) seems to have top-quality allocators.
Highway concession operators: Impulsora, Promotora, and Aleatica
The highway concession business is very profitable and stable. In addition, the country needs infrastructure, and PPP deals will probably keep providing growth for these companies. Unfortunately, only Promotora y Operadora de Infraestructura is potentially investable, as both Impulsora del Desarollo and Aleatica are almost totally illiquid.
Traxion: low-margin trucking roll-up dressed as tech
Traxion is a roll-up play in the cargo, personnel transportation and logistics brokerage businesses. All of these businesses are fairly commoditized and have super low barriers to entry. The company has fueled its acquisition-led growth with debt, which interest is significantly higher than Traxion’s ROIC, making debt fundamentally a bad decision over the long-term. Despite having only 30% of debt to assets, interest is already close to operating income, and puts a limit to debt-fueled growth.
REITS
Industrial pure-plays: Prologis, Macquarie, and Terrafina.
There are three (two) pure-play industrial REITs (called FIBRAs) in Mexico: Prologis, Macquarie, and Terrafina (which has been acquired and will probably be delisted by Prologis).
The industrial REIT business has embedded some anti-cyclicality despite the natural cycles of manufacturing because leases renew over time, and lease length is long. Assuming average profitability, based on cycle peak and bottom rent per square feet and occupancy, these REITs offer reasonable but relatively low yields.
Conglomerates
Interesting conglomerates: Grupo Mexico and Alfa
Grupo Mexico is a conglomerate that has shown great capital allocation, managing a very successful copper mining business (trading separately as Southern Copper Corporation, SCCO) and one of the two main railway networks in Mexico (trading separately as GMexico Transportes GMXTF). Although I haven’t yet studied the copper industry, Grupo Mexico offers a huge conglomerate discount to SCCO’s operations, on top of the already good GMexico Transportes business.
Grupo Alfa is an interesting special situation play, based on the quite likely spin-off of its petrochemical business (Alpek), leaving a much more valuable (albeit leveraged) packaged food business pure play.
Other conglomerates: Grupo Carso and Grupo Kuo
These two companies are more diversified than the above conglomerates, and their business is not that good. They haven’t grown their businesses nearly as much, and trade at much higher valuations.
Manufacturing
Challenged auto part manufacturers: Nemak, Grupo Industrial Saltillo, and Strattec.
The auto parts business is generally bad: high capital costs, that have to be made in advance, with the automakers having the upper hand in negotiation. The Mexican autopartists are no difference, with secularly decreasing margins, high leverage, and high exposure to ICEs.
1. Materials - Cement
The Mexican cement manufacturers enjoy high operating margins and returns on capital based on a healthy competitive environment (with regional oligopolies) and rational capital allocation.
The industry is in a boom in Mexico (last year construction expanded 15%), which warns against a potential cyclical reversal. The companies in this segment have quality characteristics, and their yields are ok on a cycle-adjusted basis, but I would wait for a potential cycle reversal.
1.1 Corporacion Moctezuma (CMZOF, CMOCTEZ.MX): cost-leader.
A more detailed version of this analysis is available in Seeking Alpha.
Center region: Moctezuma’s plants are located in the central regions of the country, one in CDMX, one in the Bajio (San Luis Potosi) and one in the center-south (Veracruz).
Cost leadership: Moctezuma enjoys 65% gross margins, twice above Cemex and GCC. Cost is at the center. For example, the company operates with 1k employees versus 3k, with similar revenues. Its managers and directors made $4 million last year, while posting $400 million in operating income. The impressive operating margins (average of 40% past 8 years) really yields from cyclicality (it’s not the same to lose 4pp of margin on an 8% margin business than on a 40% margin business).
Low to mid growth: The company has grown quite in line with Mexico’s GDP, meaning some stagnation in the 2010s and a post-pandemic boom. This means over time growth should not be huge.
Full capital return: 70/80% of net income is paid to shareholders in the form of dividends. The company has no debt and holds $380 million in cash. ROE is currently close to 50%, and has averaged.
Very low liquidity: I think Moctezuma is fairly valued, offering a yield of 9.5% on cycle-average earnings. However, opening a position would be hard, because it trades an average of 14 million shares per year ($50 million).
1.2 GCC (GCWOF, GCC.MX): US Rockies oligopoly.
A more detailed version of this analysis is available in Seeking Alpha.
Not Mexican: GCC is a Mexican company and its shares trade in Mexico, but the company has 75%+ of its operations in the Center-West states of the US (drawing a line from Mexico’s Chihuahua and into Canada’s Alberta).
Roll-up in shrinking industry: US cement production has been shrinking for almost two decades after the GFC, with cement demand still below the 2007 levels. GCC has grown by acquisition, with 8 cement plants and almost 50 concrete plants in the regions it controls. It only acquires in what it calls its ‘network’.
Very countercyclical capital allocation: Most of GCC’s CAPEX and allocations happened post-2022 rate hikes and post-GFC. This is when other manufacturers were strained with low utilization and assets could be acquired more cheaply.
Dry powder for the next cycle: GCC has accumulated almost $1B in cash ($500 million net of cheap fixed rate sustainability-linked debt).
Fair on cycle-average basis: Because of shrinking production in the US, cement pricing has been very powerful, and current margins are record (making the company yield 14%). Still, on an average basis (8% yield) the name is fair, considering growth a little above GDP, and the potential for countercyclical GDP.
1.3 Cemex (CX, CEMEXCPO.CX): Mexican multinational
Globally diversified: Cemex is a monster with a capacity for almost 90 million tons (compared to 7.5 million for Moctezuma or GGC). Out of those 90 million, “only” 28 are in Mexico, still making it by far the largest in the country.
Mexican read: Although Cemex doesn’t make much sense as a play in Mexican nearshoring because of its exposure to many other geographies, it is still important to read the company for its effect in Mexico.
The company’s Mexican operations are illustrative of the profitability and boom in the country’s industry (and a warning against excessive confidence in the current cycle). Cemex’s Mexican operations boast a 30% EBITDA margin, versus 12% for the combined entity. The country grew 45% since 2021 versus less than 20% for the aggregate company.
2. Materials - Chemicals
The chemical businesses are not purely Mexican, with two being more multinational. These are not fantastic businesses (commoditized, low margins), but they pass the Burry-criteria of being profitable during the down portion and not doing stupid things with capital. They are interesting because they are on the downward portion of the cycle, trading at low multiples of cycle-average earnings.
2.1 Orbia (MXCHF, ORBIA.MX): PVC leader at bottom multiples
I own shares of Orbia (ORBIA.MX).
A more detailed version of this analysis is available in Seeking Alpha.
PVC vertical integration: Orbia is probably the largest player in PVC in the west: one of the largest producers of caustic soda, an ethylene JV with Occidental, self-sufficient in vinyl, and leading in several end-application markets (irrigation, infrastructure and telecommunications).
Fluorite integration: The company also derives 15/30% of its operating income from its fluorite business. Orbia mines 18% of the world’s fluorite (by far the largest outside of China) and commands a 75% market share in medical propellents.
Cyclical: The company’s operating margins are very cyclical, although not terribly low (6% on the valley, 18% peak, 12% average).
Positive secular trends: I believe the PVC market has a lot of room in the emerging markets, mainly because of infrastructural deficits. The irrigation market could also help with more capital in emerging economies.
Leveraged but manageable: Net debt is high at $4.4 billion (6x cycle-average operating income), but is cheap (5% average yield), lengthy (10-year average maturity) and fixed (75%). Therefore it is manageable and desirable to have this leverage.
Down and out: With pressure from excess capacity in China, global PVC markets have been challenged. Prices are back to pre-pandemic levels, and Orbia’s margins are as low as they were during the 2014/16 bear market in the commodity. If one could speculate on a margin recovery, the company offers a 20% yield on cycle-average earnings. This is on top of a current yield of 7.5% (with super-low margins).
2.3 Alpek (ALPKF, ALPEKA.MX)
I own shares of Orbia (ORBIA.MX).
A more detailed version of this analysis is available in Seeking Alpha.
Non-integrated PTA/PET and EPS leader Americas: Alpek specializes in the PTA/PET chain (#2 in the World by production, 80% of revenues, 50/75% of EBITDA) and the PP and EPS chains. The company does not participate in the input chain of these products (paraxylene, ethylene, MEG, naphtha, etc.).
Not cyclical demand: Given that both PTA/PET and PP/EPS products are used in food and CPG packaging, their demand is not particularly volatile, in terms of volumes. Pricing for these products (and therefore absolute revenues) do change, with the price of oil.
Cyclical: The company’s margins have cycled, driven by capacity availability in North America and excess capacity (and transport costs) from Asia. At the bottom its operating margins are closer to 4%, with peaks of 12%, and an average (across last three cycles) of 7.75%. Currently margins are very challenged because of Chinese pressure, with some improvements thanks to high transport costs.
Cyclical capital allocation: Unfortunately, Alpek has invested more during booms than during busts, leading to some impairment in assets during the busts. The latest one is the write-off to zero to a PTA facility in Corpus Christi, TX.
Cyclical debt but manageable: Adding to the problem, they have taken debt cyclically, also a mistake. Still, the debt is manageable. Alpek owes $1.1 billion in long-term notes (maturing in 2029 and 2031), with a very low coupon of 3.25% and 4.25%. The company also owes about $700 million in credit facilities, paying SOFR + 1.5%. Alpek has about $400 million in cash to cover liquidity needs if necessary. Interest (~$80 million) is well covered by operating income even during the current down cycle ($240 million).
Good cycle-average yield: Based on cycle-average figures, the company could produce net income in the realm of $350 million under a moderate recovery, but trades at a market cap of $1.25 billion, offering a yield above 25%. The current yield is ok at 10%.
Spin-off movements: Alfa S.A. (more below) owns 35% of Alpek, and is planning to spin-off its shares via a dividend to shareholders. The spin-off will occur via another listed vehicle (Controladora Alpek), which will own the 35%, to avoid a sudden surge of selling pressure on Alpek’s shares. That means Alfa shareholders will not be able to sell Alpek shares directly.
2.3 Cydsa (CDSAF, CYDSASAA.MX): Salts and derivatives.
A more detailed version of this analysis is available in Seeking Alpha.
Salts, caustic soda, and chlorine: Cydsa produces salt, caustic soda, and chlorine from brine deposits in Veracruz. 90% of the company’s production is sold in the domestic market. These businesses generate about 75% of the company’s operating income.
Good margins despite cycle: The main business is cyclical, but so far, Cydsa has maintained good margins, averaging 16% since 2015, with low(er) levels in the 12% region. I believe this positive margin dynamic is driven by low costs. For example, Cydsa produces its own energy (two thermal plants for a combined 130MW), which allows it to arbitrage the price of natural gas (freely set in Mexico) and that of electricity (government set).
Refrigerants and fuel deposit: In addition to the salts business, Cydsa also processes and packages refrigerants used in industrial settings out of fluorite in a JV with Honeywell (Quimobasicos). The company also converted empty brine deposits into the first underground hydrocarbon deposits in LatAm, used to store GLPs.
Currency play: Before 2022, Cydsa had most of its debt in USD, at fixed rates. Then, in 2023 and early 2024, the company started to issue MXN debt (at 10/12% + 200bps rates) to buy USD debt, profiting from the low exchange rate. The company shifted 40% of debt to MXN, meaning 20% higher interest, but this was repaid when the MXN depreciated 20% in late 2024.
Fair cycle-average yield, but I would wait: The company’s cycle-average yield is about 12%, which is not bad. However, chlorine prices are still falling from the 2022 peaks and Cydsa’s margins are still too close to records. That means there will be probably better opportunities in the future.
3. Materials - Steel
3.1 Industrias CH (ICHBF, ICHB.MX) and Grupo Simec (SIM):
A more detailed version of this analysis is available in Seeking Alpha.
Mini-mill for construction: Industrias CH owns eight mini-mills in Mexico, six in the US, three in Brazil, and one in Canada. This type of steel operation requires lower CAPEX, can work with smaller batches, and therefore suffers less from operational leverage. The company purchases scrap, melts it, and then processes it into more niche alloys and shapes.
Construction and automotive: In terms of sales, the construction market makes up most of Industrias CH’s demand (78% combined revenues), with the automotive market absorbing another 10%. It may be that the automotive’s weight on profits is higher because of being more specialized products.
Commoditized, ok margins: The construction side of the business is probably highly commoditized. The pre-pandemic margins hovered 4/5% average. The company’s situation today is not easy to explain, with operating margins still close to 18% despite revenues falling almost 50% from their peak. I think that, like many mini-mill processors, Industrias CH’s margins are not as affected by steel prices (which move revenues) as by the availability of processing capacity (which move volumes). Even today, Industrias CH has a lot of spare capacity, so that higher volumes make margins go up.
Counter-cyclical dry powder: The company made acquisitions at the correct times, including GFC and dot-com aftermath in the US and 2018 in Brazil (when the country was in deep recession territory). Today, the company accumulated $1.6 billion in cash, that I think it will deploy in the next down market.
Yield not fantastic: Even giving more weight to current periods, the yield on average earnings is still low at around 7%. I think Industrias CH will offer better opportunities ahead, with the industry down and the company deploying cash.
Grupo Simec: Simec is consolidated into Industrias CH, accounts for 85% of the company’s operating income, and owns most of the cash reserves. For reasons I cannot understand, Simec’s stock trades more dearly than Industrias CH.
4. Transportation
4.1 Grupo Mexico Transportes (GMXTF, GMXT.MX): Last train to Texas.
A more detailed version of this analysis is available in Seeking Alpha.
Duopoly: GMXTF owns one of the two railway lines connecting Mexico’s industrial centers with the US and monopolizes all the Northwestern frontier routes (Juarez, Nogales, Mexicali). GMXTF has an alliance with UP and BNSF for US connections. Train freight costs are 30% of trucking in most cases. Its competitor, CPKG, owns the concession on the Laredo line (Laredo has 50%+ of all Mexico-US traffic).
Management excellence: The company has sustained 30% operating margins, maintains very low leverage, and has grown at 13% CAGR since inception (9% CAGR last decade) despite returning 60% of FCF to shareholders. It is owned and controlled by Grupo Mexico (described below).
Recession resistant: GMXTF’s revenues fell only 15% during GFC, with very low operational leverage (EBITDA fell 20%). By 2011, they were above pre-GFC levels. The 15/16 train crisis and COVID were a sneeze on its profits.
Not growing much: The company’s plan is to invest $400/500 million per year, similar to D&A and to what they have done in recent years. Given the correlation between business and asset size, this probably indicates slow(er) growth in the future.
Multiple a bit high: IMHO, the stock is a little pricey at 18x earnings, considering it is not planning to invest that much in growth in the future. Of course, this is half the multiple of US railroad peers.
4.2 Highway concession operators: Promotora (PYOIF, PINFRA.MX), Impulsora (IPSBF, IDEALB.MX), and Aleatic (ALEATIC.MX)
A more detailed version of the analysis on Impulsora del Desarrollo y el Empleo en America Latina (abb. Impulsora) can be found on Seeking Alpha in this link, and the same can be said for Promotra y Operadora de Infraestructura (abb. Promotora) in this link.
Low liquidity: Maybe because they are good businesses, but both Impulsora and Aleatica trade extremely little, almost negligible amounts of shares, even in the Mexican exchanges. Promotora is the only truly accessible investment, and therefore the below discussion is mostly about Promotora.
Great businesses: The concession operators bid, build and then maintain highways in Mexico. The business is highly profitable, and safe. On the one hand, the company’s are guaranteed a return (ranging from 10% to 12% in real terms) on capital over the period of the contract. The contracts also have inflation adjustment clauses. The assets are almost natural monopolies in the regions where they are located. Finally, the amount of vehicles going through toll roads will vary but not so much during crises, and the companies’ super margins shield a lot of that volatility. This led to very profitable companies. In the case of Promotora it has operating margins well above 50%, and similarly for Impulsora.
Secular tailwinds: One of the aspects touched on my Mexico nearshoring article was the need for infrastructure investment, one of these areas being road transportation. The concession operators are well positioned to grow thanks to this, and we can see a clear correlation between asset growth (recorded in intangibles mainly) and revenues. Over the past decade, Promotora grew above a 10% CAGR.
Conservative financing: Promotora owes less than 1.5x operating income, and about 20% of its assets are owned by minotiry interests. The company has almost $1.5 billion in cash.
Fair to opportunistic yield: Promotora trades at a current yield of 10%. If the company was able to pull the same type of growth it had during the past decade going forward, it would be a very interesting investment. I will have it high in my ‘quality during chaos’ list.
Strange accounting in Impulsora: Impulsora has similar characteristics to Promotora, but its minority interests are higher (almost 50% of net income), and the company does some strange accounting with its debt and assets. This is something to pay a lot of attention to for interested readers, but the stock is so little traded that I prefer to save digital ink.
4.3 Grupo Traxion (GRPOF, TRAXIONA.MX): Roll-up truck play reaching its limit.
A more detailed version of this analysis is available in Seeking Alpha.
Truck and logistics roll-up: Traxion is a roll-up play on trucking and logistic assets. The efrom factories), and in logistics brokerage. The company has 10x assets since 2011, and acquired more than ten companies in the process.
Low business quality: None of these businesses is particularly defensible, the barriers to entry are negligible, and they have significant sensibility to business conditions. Despite this, Traxion’s margins are not that bad, at 8/10% operating, with low volatility.
Model limit, debt vs ROIC: Traxion has financed a part of its growth via debt (1/3 of assets today), and the rest with equity. The problem is that Mexican rates are high (today the interbank rate is close to 10/12%), and that Traxion’s returns on capital are very low (7% pre-tax). If you grow debt to finance assets that return less than the debt, you are basically losing money, not to mention the increasing risk of getting interest so close to operating income. This means that Traxion will not be able to continue growing with debt for a long time, and that it’s super exposed to a downward cycle.
Valuation requires growth: The company offers a yield of less than 5%, implying that it will continue growing into the future. Its self-financed rate of growth is very low, probably close to MXN 700 million (on a MXN 40 billion balance sheet) vs MXN 3/4 billion in CAPEX and acquisitions in recent years.
5. Industrial REITs (FIBRAs): Prologis (FBBPF, FIBRAPL14.MX), Macquarie (DBMBF, FIBRAMQ12.MX), Terrafina (CBAOF, TERRA13.MX).
More detailed versions of this analysis can be found in Seeking Alpha posts, here: Prologis (link), Macquarie (link), Terrafina (link).
Three (two) pure-plays: There are three pure-play industrial REITs (called FIBRAs) in Mexico: Prologis, Macquarie, and Terrafina. Terrafina’s control has been acquired by Prologis, and will probably be delisted. Independently of the delisting, Prologis will consolidate Terrafina (already at 77% ownership).
Pur(ish)-plays: Other REITs in the country have exposure to industrial properties, but only Prologis and Macquarie are close to pure-plays. I say close to, because Prologis derives about half of its income from logistic properties tied more to domestic consumption (e-commerce and retail), and Macquarie derives ¼ of revenues from retailing properties.
Dampened cycle: The REITs have natural and attractive cycle-dampening properties. Its leases do not have sales adjustments (except for the retail properties at Macquarie), the contracts are long-term, and tenants have incentives not to move, particularly in manufacturing. Because leases mature on stages, a move up or down in rent per sqft. takes years to fully impact on the averages. Finally, with very high operating margins and variable expenses, they do not suffer as much from operating leverage.
Little growth: REITs have natural limits to organic and per share growth because they need to distribute earnings. None of the REITs has grown operating income per share much, even measuring from 2014 (cycle bottom) to 2023 (cycle top). Assets per share have grown because of mark-to-model asset revaluations.
Current cycle-top: The industrial property market is currently hot, and probably already turning. Vacancies are higher in the North, and this will eventually affect new lease prices. Because of their dampening properties, the cycle does not affect the REITs up or down as much. Still, modelling future earnings at current rates of rent per sqft. is not very conservative. Based on a cycle-average of occupancy and rent/sqft, the REITs offer yields of 8/12%, which I think are fair, although not the type of return I’m looking for.
6. Conglomerates
6.1 Grupo Mexico (GMBXF, GMEXICOB.MX): great capital allocators with a conglomerate discount on copper.
Grupo Mexico has shown great capital allocation abilities for over three decades, growing two difficult businesses in copper and trains, and maintaining financial prudence. For readers with a better understanding of copper, Grupo Mexico seems like an interesting idea, as it trades at a 50% discount to its equity holdings.
Great capital allocators: Grupo Mexico has compounded its share price by 13% in dollars, for over 19 years. If we add dividends, the stock has returned 16% compounded. It has done so while in an emerging market and participating in two difficult industries: copper and trains.
Copper cost leader: 82% of GMexico’s operating income comes from its mining division, called Americas Mining Corporation. Out of the mining division, the majority of profits come from the Southern Copper Corporation, which trades under the ticket SCCO.
SCCO claims to be one of the lowest cash-cost producers of copper, and has absolutely smoked the commodity, returning 4,200% since the controlling stake was acquired by Grupo Mexico in 2004.
I am not delved in mining, and therefore have not analyzed this company in detail, but the returns speak of Grupo Mexico’s operational capacity.
Train duopoly: The remaining large division is Grupo Mexico Transportes, one of the two main railway networks in the country that form a quasi duopoly of the market. I will dedicate a specific section to GMexico Transportes, which also trades under its own tickers GMEXICOB.MX or GMXTF.
Huge conglomerate discount: Grupo Mexico owns 89% of SCCO and 70% of GMexico Transportes. The combined stakes are worth about $84 billion at market value. Despite, Grupo Mexico trades at barely above half of that, for a market cap of $44 billion.
Opportunity? It depends: I don’t think Grupo Mexico will spin-off its SCCO shares or anything, and therefore the question of whether or not the discount implies an opportunity depends on SCCO valuation. If SCCO is worth half of its market cap, then potentially Grupo Mexico is fairly valued only. I have not analyzed mining or copper stocks and I’m not starting now, therefore this question will remain unanswered, but for readers bullish on copper, SCCO and GMEXICOB seem very compelling.
6.2 Alfa S.A.B. (ALFFF, ALFAA.MX): unlocking value via spin-offs
A more detailed version of this analysis is available in Seeking Alpha.
Disassembling a conglomerate: Alfa is another example of a huge Mexican conglomerate (see Kuo, Carso below) that operated in food, petrochemicals, auto parts, steel, and telco. They decided to do the right thing and spin off into independents. Already did so with Nemak (auto parts, more below) and Axtel (telco). They are in the process of separating Alpek (petrochem) from Sigma (pork products and cheese).
Petrochemical business: Alpek (ALPKF) is one of the largest PET producers in the Americas (separate entry above). It is a classical process-type petrochemical business charging a fixed gross margin over input cost. Cyclicality affects its margins, more than volumes.
Food business: Sigma, a branded packaged food business with okay brands in sausages, cheese, and hams in the US, Mexico, and Spain (they claim to be number 1 in some categories, but I don’t think so). Much more stable business, at about $800 million EBIT.
Leveraged: 30/50% of operating income going to interest, and net debt at 5/6x EBIT.
Valuation together: At $3.2 billion market cap versus the potential to generate $1.2/1.8B EBIT depending on the Alpek cycle, and ($400/500M interest), it is attractive.
Valuation separate: They will probably spin-off Alpek (0.35 ADR per Alfa ADR, or $0.2 discount on current $0.68 price). The P/E of post spin-off Sigma is closer to 10x because Sigma will maintain most of the debt, not a great situation. Still, they are looking for ways to deal with the debt overhang.
6.3 The so-so conglomerates: Grupo Carso (GPOVF, GCARSOA1.MX), and Grupo Kuo (GKSDF, KUOB.MX)
More detailed articles on Grupo Carso and Grupo Kuo are available on Seeking Alpha.
These conglomerates are too big and diversified, which already incorporates significant complexity. They require the investor to understand many markets at once. Their growth has been very moderate, and don’t have the best history of capital allocation. They currently trade at what I consider to be high multiples instead of offering a conglomerate discount (like Alfa). Therefore, they are not a great opportunity.
Grupo Carso: One of the holdings of Carlos Slim’s family (Carso come from Carlos and Soraya, Carlos’ wife). The businesses:
Retailing: Sanborns retail + restaurant concept and Sears franchisee
Manufacturing: cabling for telecom, construction, and autos
Infrastructure: telecom tubing and public civil engineering and construction.
Energy: gas pipelines connecting the US and Mexico, and an exploitation authorization for offshore gas in the Gulf, still in development.
Construction materials: Elementia (copper piping) and Fortaleza (cement).
Each of these businesses accounts for about 20% of the operating income (infra 26%, construction 11%).
Grupo Kuo: The group operates in four markets. The figures below are in pro-forma proportional consolidation.
Consumption segment (51% of EBIT): operates the largest pork business in Mexico (vertically integrated from genetics to retail), and owns 50% of Herdez del Fuerte (the other 50% is owned by Herdez).
Chemical segment (21% of EBIT): 50% of Dynasol, a JV with Repsol that is one of the leading global players in synthetic rubber, and Respirene, a Mexican polystyrene derivatives manufacturer.
Auto Parts (28% of EBIT): Tremec, provider of transmission for ICE.
Wide diversification: The first problem with these conglomerates is that understanding them requires significant effort, simply because they operate in so many businesses. Pure play Mexican options exist in most of their markets anyways. Not a deal breaker (specially if they offered a conglomerate discount on earnings, book value or capital allocation), but this clearly is a negative.
Not the best industries:
Carso’s retailing and manufacturing businesses have been stagnant since the pandemic. Retailing could be the best operation but it seems to be moderately challenged. Infrastructure is growing but increasingly via public works, which obviously adds lots of political and cycle risks. Maybe the gas pipelines are the best business in terms of durability and profitability.
Kuo’s best business is clearly Herdez del Fuerte, which can be accessed via Herdez (check my post on LatAm food producers). The pork business is really challenged by imports, because Mexico is not a food giant like the US or Brazil. Tremec probably has a defunction date given that EVs have way simpler transmissions. Dynasol may have a better position.
Not the best historical performance: Neither Carso nor Kuo have compounded capital or profits significantly. Carso’s stock returned 200% since 2010 (USD), but all of that return occurred after the company recorded large accounting gains by taking Elementia and Fortaleza private. Kuo also returned 200% since 2010, but in MXN so about 100% in USD, and most of that follows the movements of Herdez.
Valuation does not seem attractive: Carso trades at 2x P/B versus a historical ROE of 10% and no growth in book value (again, outside of accounting from consolidation). Despite little growth, it trades at a P/E of 18x. Kuo trades at a more interesting 10% yield on cycle-average earnings (assuming recovery in petrochem and pork), but that seems low in my opinion.
7. Manufacturing - Auto parts
7.1 Distressed auto part manufacturers: Nemak (NMAKF, NEMAKA.MX), Strattec (STRT), and Grupo Saltillo (GISMF, GISSAA.MX).
Terrible industry: So far, I have not found one company that has profitable and consistent operations in the auto parts industry. The economics of the industry are terrible for the manufacturers:
The product sold is generally under spec and sold to engineers, automatically making it a commodity. There is no service or branding attached; it is just a spec sheet.
They have to spend R&D money just to win the design, so before they sit down to negotiate, they are already deeply in the red. This is not a great bargaining position.
After they win a design, they need to build all the machining and tooling for that piece before getting any work. This puts a big strain on their cash flow.
The automaker or OEM does not really have a very strong purchase commitment, making the auto part manufacturer the main risk party.
During the contract, the manufacturer has to reduce prices over time to account for ‘efficiency’ gains.
Supply cost pass-through clauses (mostly raw materials only, no labor) take six months to 1 year to implement, also straining the company’s cash flows.
Post-COVID auto market: Except for China, no other large auto market is producing above pre-COVID levels. This probably leads to large excess capacity and more depression on margins.
The Mexicans are no different: The operating margins of the manufacturers above have been in the 3/5% range since COVID and were closer to 7/9% before that. The 10-year median ROICs are 4/5%. With one-third of their balance sheets financed with debt, it does not take too high rates to put these producers close to breakeven levels.
Nemak’s special position: It is in a somewhat better position because it manufactures engines and transmissions of ICE cars. These products tend to have lower variability between models, higher technical complexity, and a longer life cycle. However, the brand is much more exposed to EVs, that have totally different engines and transmissions.
Distressed valuations? Nemak currently trades for a P/E of less than 3x and a market cap of 1x the net income it generated before the pandemic. On an EV/NOPAT basis, it is a different movie, at 10x. Strattec trades at a P/E of 10x, but only because it is currently in the cost recovery portion of the cycle. On an average basis, the P/E is closer to 30x. Finally, Saltillo trades at an EV/NOPAT of 10x or a slightly lower P/E on an adjusted basis.
These do not seem high or crazy valuations, but these are not great businesses. The much better positioned automakers also trade at single-digit P/Es, sometimes less than 5x.
Conclusions
A lot of people don’t look at Industrials because they think they are bad markets for finding good stocks. In general, this is true, but maybe because of this, we can sometimes find opportunities too. Among these Mexican Industrials, I found three names that are interesting, to say the least.
Paraphrasing Peter Lynch, at the end of the day, the one that lifts more rocks finds more opportunities. If you want to continue receiving fast stock analysis like this, plus more in depth industry and trend analysis, don’t forget to subscribe.
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Until next time!