A Mexican Play on Cement
09/12/2017 2:50 am EST
For investors comfortable with the risks associated with buying stocks on a foreign exchange, Charles Mizrahi, editor of Insider Alert, looks to a Mexican-based cement producer.
I have been researching companies that are dominant in their industry, usually with little to no competition, trading at bargain prices, and located outside the U.S.
When we started researching international stocks, one company jumped off the pages at us — and we decided that would be our first international stock selection.
Grupo Cementos de Chihuahua SAB de CV (GCC) has seven cement plants, three of which are in its home state of Chihuahua and four of which are in the U.S.
GCC’s Mexican operations are far more profitable than U.S. operators’, due to an oligopolistic market structure and weak anti-trust enforcement.
Of the six cement producers in Mexico — Cemex (CX) is the biggest with 50% market share — GCC is relatively small with a 4% market share.
However, market share isn’t everything when it comes to cement. Land transportation is one of the biggest costs in cement production due to cement’s heavy weight and relatively low value.
This results in regional markets that are dominated by a few companies. In the state of Chihuahua (population 3.5 million), GCC dominates the cement market.
Because Chihuahua borders New Mexico and Texas, several of GCC’s largest markets in the U.S. are Colorado, New Mexico, and North and South Dakota.
We see future growth materializing in the U.S. and Mexico through increased infrastructure spending, which is currently lacking in both countries.
In the U.S., public construction spending as a percentage of GDP is at its lowest point in decades…1.42% as of the second quarter of 2017.
The Trump administration has indicated that it intends to pass a $1 trillion infrastructure plan that will be implemented over a 10-year period. GCC’s biggest revenue driver is U.S. government spending, which accounted for 52% of revenue.
According to the World Economic Forum, Mexico is ranked 59th out of 140 countries in infrastructure. Chihuahua has a greater need for highways, roads, and bridges because of its expansive geography — it covers more than 12% of the country’s area.
We see the strong demand for infrastructure in Mexico and the U.S. as a tailwind for GCC. GCC is an obscure company trading at a discount to both Latin and U.S. cement producers.
GCC trades on the Mexican Stock Exchange (BX or BMV). It is currently selling at an attractive price both on a relative and absolute basis. Buy Grupo Cementos de Chihuahua SAB de CV at or below $100 MXN.