Three Ways to Play Mexico

04/21/2015 10:00 am EST

Focus: STOCKS

Mexico was supposed to benefit hugely from the NAFTA, but this never happened. Since 1994, Mexican economic growth has remained very sluggish, observes Martin Hutchinson, editor of Daily Profit.

Nevertheless, 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.

These changes have begun to speed the economy. The Economist’s team of forecasters sees 2.8% growth in 2015 speeding to 3.5% in 2016.

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. 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.

Meanwhile, there are a number of good well-priced stocks available to US-based investors in Mexico. However, for an overall position in the market, the iShares Mexico Capped ETF (EWW).

Beyond the index as a whole, there are a couple of Mexican stocks that sell heavily into the US market and should benefit from the decline in the peso.

Industrias Bachoco S.a.b. de C.V. (IBA) is Mexico's largest poultry producer, with a growing operation in the US.

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. (SIM) is a specialty steel producer that manufactures and distributes steel in Mexico, the US, Canada, and other parts of the Americas.

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.

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