Worried About China/US Relations? Buy Mexico
Bolsa Mexicana, the near-monopoly Mexican stock exchange, is Muy Attractivo
There are currently two U.S. aircraft carrier groups in the Indo-Pacific Ocean and none currently in the Middle East. The USS Nimitz pictured above is on its way right now. What does that say about America’s strategic worries?
America and China might be on a collision course, a reckoning of a 30-year relationship that no longer appears to work for either country. Even without direct conflict, at a minimum the two countries will continue to butt heads over control and influence in Asia, Taiwan independence, over semiconductors and on trade, intellectual property rights and more. The pandemic and resulting supply chain issues have only exacerbated existing tensions. The following tweet is a great example of how smart investors are increasingly worried about China and Taiwan (over one thousand people voted yes in this poll):
If you are a U.S. manufacturer who depends on China or Southeast Asia for your supply chain, how do you justify to your investors or your board complete reliance on the whims of the Chinese government? At a minimum, it makes sense to diversify some of your supply chain. And if you are the U.S. government, while you will try to encourage more jobs and factories to be in the U.S., you realize that our labor force doesn’t have the skills and/or the cost structure to be competitive in manufacturing.
So where else can U.S. companies go for manufacturing and supply chain where there is a low-cost labor pool with an existing manufacturing and supply chain infrastructure that can be ramped up while at the same time placating the U.S. government, which could influence any disruptions that present a national security issue?
Mexico is right on our doorstep, is a country with a young, cost-effective labor pool and a manufacturing, engineering and supply chain that could help augment America’s reliance on Asia. And as a result of the USMCA, Mexico and the US are deeply intertwined and reliant on each other more than ever. In my humble opinion, more capital will flow to Mexico, it is only a matter of time before capital ramps up in earnest.
And right on cue Janet Yellen, soon after becoming the new US Treasury Secretary, spoke to her counterparts in Mexico on Tuesday.
What is fascinating is that not only are most Mexican publicly traded stocks selling for very attractive valuations, the country’s near-monopoly stock exchange Bolsa Mexicana (Mexico: BOLSAA), is itself publicly traded and sells for an absurdly low valuation. Bolsa trades at a growing 9% unlevered free cash flow yield based on 2021 estimates. If capital flows accelerate into Mexico, the stock exchange will be a prime beneficiary.
Investors have come to realize that stock exchanges are phenomenal businesses yet are overlooking Bolsa. Just look, for example, at the last ten-year performance of Intercontinental Exchange (NYSE: ICE), the company that owns the New York Stock Exchange. The stock is up almost four times in the last eight years and now trades at 32 times earnings. And ICE’s valuation is not an outlier, take a look at the valuations of some of the leading stock exchanges from around the world that are publicly traded.
And here is the best part about Bolsa Mexicana, the company’s underlying custodial and information businesses are expected to grow at almost 20% per year. Nearly half of Bolsa’s revenue comes from these high-quality, fee-based central securities depository and information services and connectivity businesses. The company is dis-intermediating local custodians, and we all know how increasingly critical fast data is in the investment business. So, despite Bolsa’s faster growth and upside optionality of additional capital flows, Bolsa has the lowest valuation. How long is that discrepancy to last?
Bolsa’s core businesses are so good that even if my thesis is wrong about tensions with China being a big positive for Mexico, Bolsa is still on track to grow to a level that in two years, I estimate the stock will trade at a totally absurd 13% FCF yield. Do you really think that a business as good as a national stock exchange with no leverage will trade at such a valuation?
One more catalyst is that Mexico only has 140 listed publicly traded companies, an extremely low number for the 15th or so largest economy in the world. It is amazing to me that an investor can buy a national stock exchange for approximately a $1.4 billion market cap. If I’m right that capital flows will increase into Mexico, the number of publicly traded equities and debt securities could jump significantly. And in that case, Bolsa’s cash flow could explode higher. Olé!
With the Brazilian stock exchange B3 (Brazil: B3SA3) owning 6% of Bolsa and many international stock exchanges trading at significantly higher multiples, Bolsa is a prime acquisition target as well. Note that B3 has a market cap of almost $24 billion.
Every time I see a headline about the worsening tensions between America and China, I think about how much Mexico is going to benefit. The tailwind of capital that will be reallocated from Asia should make Bolsa’s severe undervaluation even more extreme. When capital starts flowing in earnest to Mexico, investors may chase Bolsa to a much higher stock price in the very near future. Sí, por favor!
P.S. There is a wonderful report on Value Investors Club that was written last June that goes much more in depth into Bolsa and how great the underlying business really is. I believe the writer’s numbers will prove conservative. You don’t need to be a member to view this idea: https://www.valueinvestorsclub.com/idea/Bolsa_Mexicana_de_Valores/6915673504
P.P.S. I’m not the only one seeing opportunity in Mexico. Packy McCormick of the NotBoring newsletter wrote up Femsa (NYSE: FMX) calling it the most interesting company in Mexico: https://notboring.substack.com/p/femsa.