Mexico's Resurgence Gains Momentum

 | Aug 20, 2013 | 11:00 AM EDT  | Comments
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Stock quotes in this article:

cx

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tv

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dis

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foxa

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hal

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slb

 In Monday's column, we discussed Mexico's improving long-term economic prospects. Political parties have come together since the election of President Nieto late last year. They have started to push through reforms that cut across a large swath of Mexico's industries and economy.

These efforts should result in better economic growth in the years ahead. We looked at how the initiatives will be good for the country's long term future.

We will discuss today some individual companies that should benefit from the results of these reforms.

Cemex (CX) is one of the largest cement producers in the world. The stock has quadrupled off its low since the market nadir in March 2009. It is still down, however, by two-thirds from its pre-financial crisis levels. The company is benefitting greatly from a turnaround from its U.S. operations where earnings before interest, taxes, depreciation and amortization almost tripled year on year during its last quarterly report.

The company will be buoyed from improving long-term growth prospects in its home base of Mexico. The company also is poised to be one of the primary beneficiaries if a proposed $300 billion plus five-year government infrastructure spending bill passes the Mexican legislature.

The one caveat on this firm is its substantial debt load. It has used the low interest rate environment, however, as well as its improving business fundamentals to push back debt maturities and to lower its overall interest rate. It should be able to use its improving cash flow to pare debt even further in the years ahead.

Grupo Televisa (TV) is Mexico's biggest media conglomerate and its networks own approximately 70% of the country's prime time audience. It also controls roughly 75% of the country's pay TV market. Other assets include a 50% stake in cell phone carrier Iusacell and almost 40% of Univision. The Univision stake is particularly interesting. This network is benefitting from the rapidly growing Hispanic audience in the United States and the broadcaster is even starting to win some time slots against the more established networks such as CBS, ABC and NBC.

From an Enterprise Value/EBITDA basis, Grupo Televisa is cheaper than American media players Disney (DIS) or Twenty-First Century Fox (FOXA) even though it controls a higher percentage of its domestic market. Mexico should also grow faster than its neighbor to the north over the next few years. There is a possibility longer term of a spinoff of its Univision stake, which could unlock substantial shareholder value. Revenues are growing in the high single digits and the stock is a reasonable value at 9x operating cash flow.

In addition to these domestic plays, big oil service firms like Halliburton (HAL) and Schlumberger (SLB) should benefit from additional demand triggered by Mexico's energy reforms. Bank of America came out with comments within the last week stating reforms could mean $2.5 billion in annual revenue for the big oil service firms that can help Mexico develop its substantial oil reserves.

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