US investors looking to invest in emerging markets don’t have to stray too far from home. Mexican stocks provide a unique opportunity to take advantage of an emerging market with a growing consumer class and an increase in the value of the Mexican peso against the US dollar.
Two companies, america (NYSE: AMX)(NASDAQ: AMOV) and Wal-Mart of Mexico (OTC: WMMVY), seem to me to be attractive ways to be exposed to Mexican consumers and its currency. Here’s why.
America Movil leads the way in Mexico
America Movil is Latin America’s largest wireless operator, enjoying economies of scale in major markets, although Mexico is by far the largest. The company generates about 30% of its wireless sales in Mexico, taking a 65% share of the national wireless business. This scale gives it a considerable competitive advantage over smaller operators.
In total, America Movil has approximately 73.3 million wireless subscribers in Mexico, of which approximately 83% use prepaid services. However, its subscriber base is turning to stickier postpaid mobile contracts, which rose 6.6% in the last quarter, compared to a 0.3% drop in its larger prepaid business. Mexico is an extremely profitable geographic area for the company, generating EBIT margins above 20%, thanks to its ability to spread fixed costs over a greater number of subscribers.
Of course, the runaway success catches the eyes of competitors and regulators. Some investors are concerned about regulatory conditions in Mexico, as regulators have targeted America Movil because of its favorable competitive position as the largest wireless operator. While this represents a risk for the thesis to invest in the business, it also reflects the tangible benefits of the scale. Regulators do not target small, unprofitable businesses without pricing power. Perhaps the biggest sign of a good business is that regulators worry that you are making too much money.
In a business where scale is really everything – the telecommunications industry naturally consolidates itself to only a handful of competitors in virtually every market in the world – America Movil’s scale, predictable profit power and flow generation of free cash flow makes it an attractive way to bet on growth in Mexico and Latin America as a whole.
Wal-Mart de Mexico is an almost pure bet on consumption growth in Mexico
Established retailers are one of the best ways to play with a growing class of consumers in Mexico, and Wal-Mart de Mexico is deeply rooted in local retail. Wal-Mart, Inc. (NYSE: WMT) owns about 70% of Wal-Mart de Mexico. The remaining 30% is traded on government securities markets in Mexico and over-the-counter in the United States.
Wal-Mart de Mexico offers investors a way to invest directly in the growth of the Mexican economy and the consumer class. As of September 30, the company operated approximately 3,100 stores, generating approximately 81% of its sales in Mexico, with the remainder coming from Central America. Here is a map of the cities in which Wal-Mart de Mexico has stores.
One of the things I love most about Wal-Mart de Mexico is the opportunity to capture a significant slice of a budding e-commerce market. Compared to the United States, where e-commerce is more prevalent and winners and losers are almost decided, online sales in Mexico are much more fragmented.
E-commerce leaders only hold a small share of e-commerce activity. Amazon.com, Free Mercado, and Wal-Mart de Mexico lead the Mexican e-commerce market, with 7%, 7% and 4% market share, respectively. The remaining 82% of the pie is divided among a long list of smaller players, a slice that is ripe to be taken by the three biggest retailers.
Online retailing is very different in Mexico than it is in the United States. Because basic banking services are not widely used in Mexico – less than half of all adults have a credit card, for example – about half of e-commerce transactions are paid for in cash when products are collected in anybody. This is in stark contrast to the United States, where door-to-door delivery is much more popular than site-to-store options.
Online sales represent only about 3.5% of total retail sales in Mexico, compared to 9% of retail sales in the United States. Some projections predict that online sales in Mexico will grow by more than 20% in the coming years, as the market grows from a very small base.
I view Wal-Mart de Mexico as a stock with almost pure brick and mortar retail exposure in Mexico, with the opportunity to capitalize on one of the fastest growing e-commerce industries in the world. , which makes it an attractive way to bet on the southern neighbor of the United States.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.