Technically, a recession is when an economy has two consecutive quarters of negative growth. Is the US technically in a recession? Maybe, maybe not, but it sure feels like one. This lackluster growth rate has caused many investors to begin to look overseas to earn greater returns.
Two areas of solid growth are Latin and South America. These regions are seeing this strong growth mainly due to strong commodity prices, and the increasing "Middle-Class Expansion". Sure, there is a strong tie to the US economy, and they likely haven't fully "de-coupled" as many have hoped. However, the link is not as strong as it once was, due to global expansion and shouldn't weigh down these regions much more than it already has.
How do you safely play this region? Below are 3 picks (in three different areas of the economy) which will provide an investor with not only solid growth prospects over the next 3-5 years, but also with a reasonable margin of safety as well. All of them trade as ADRs in the US.
1) America Movil (AMX)
Ok, having one of the richest men in the world as a main investor does give me a slight bit of confidence! Carlos Slim has made his fortune in many different areas of the economy, but a large part of it has been the result of the incredible growth of this company. One of the larger Wireless companies on the planet, America Movil now offers services in 17 countries.
Its growth rate is pretty strong, having added close to 29 million new subscribers, pushing its total to over 150M users. Over half of those users are in Mexico and Brazil, economies that are holding up fairly well in the latest downturn. Currently, the cellular phone penetration into these areas is fairly strong (69% of the adult population had a cell phone in 2007), but this is still expected to push to the low 90% range in the next 5 years, giving plenty of room for growth.
Also, 3G and 4G services will likely be very popular in these areas, as there is a significant lack of landline infrastructure, likely leading to a higher ARPU (Average Revenue per User) over the next few years for AMX.
Revenues were over $29B US in 2007, and earnings were over $5B. Amazingly, its RoE is now close to 50%, and has been growing steadily over the years. With an astute management team that effectively grows through acquisition, as well as through organic growth, America Movil is starting to build an effective moat around its business.
Down from its high of just under $70, AMX likely has most of the downside priced into it at this level. With expected earnings (in USD, for the ADR) of $4.30 in 2009, this one might see the low $70 range again in 2009, if it regains its normal multiple of about 18x current year earnings.
2) Cemex (CX)
I can just see how the comments are going to start….."How on earth could you pick a cement company that has exposure to the US housing market now, and tell us that there is a reasonable margin of safety?"
I have taken this into account (see below). Cemex does about 40-45% of its business in the US; with the remainder spread out among many other countries. (There is also a reasonably high exposure to other "Spanish speaking" countries, such as Spain, Colombia and Venezuela that make up about 25% of its revenue base.)
To answer the US housing question, it is also important to note that while this weakness has hurt the demand for its products, other areas of the economy are using its products like never before. Emerging markets expansion and new infrastructure / existing infrastructure "up-keep" projects all over the world means that there is likely going to remain a strong market for Cemex's diverse product range. This should only be increased when the US housing market does start to finally turn up again, probably by mid-2009.
Cemex is now trading in and around its Book Value and at about 0.7x its Sales. Combining this with decent cash flow and a good RoE of about 17% means that Cemex is likely close to the bottom of this down cycle. With expected 2009 earnings of about $2.80 (for the ADR), and a reasonable multiple of 12x current year earnings (especially after the housing market starts to turn up next year), this one should easily see the low $30s within the next 12 months.
3) Banco de Chile (BCH)
Most North Americans know very little about Chile. I was one of them, until I married a girl born in Chile. Unlike many countries in South America, Chileans live a high standard of living, boosted by a strong, stable economy. Strong GDP growth (over 5% in 2007) has boosted the disposable income of many Chileans, increasing their desires for many different types of goods and services. Chile boasts a diversified economy, with no sector accounting for more than 20% of its GDP. Its base includes areas such as Agriculture, Fishing, Mining (Copper mainly), Manufacturing and Financial Services.
With the strong increase in the number Chileans looking to increase their net worth, there has been a large spike in mortgage applications, investment services and other financial products. The number of chequing accounts rose by 11% in 2007, while the number of people who borrowed money rose by almost 13%. This growth occurred while the percentage of past due loans actually decreased dramatically.
These things, along with a growing Chilean economy that has controlled its former inflation woes, have benefited Banco de Chile in a big way. Earnings have been growing at a 10%+ rate for many years. Its RoE is over 25%, which is outstanding for any bank. Like many foreign banks, Banco de Chile pays a strong dividend, now almost 7%. Provided that the Chilean economy remains strong, this stock should start to attract more foreign investment. With earnings expected to be in the $4.75 (for the ADR) range for 2009, this one still has some room to grow. With a conservative multiple of 12x 2009 earnings, this one could very well push into the $58 range in 12 months.
Stock position: None.
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This article has 16 comments:
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Chemist29
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36 Comments
Aug 22 10:24 AM-
Larry Bellehumeur
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65 Comments
Aug 22 11:02 AMCheers, Larry
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surfgrrl
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11 Comments
Aug 22 12:18 PMhow would you change your comments on cemex to reflect Chavez's takeover of the Venuzuela operations? how much will it affect the value of the stock and the company?
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gato
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9 Comments
Aug 22 12:41 PM-
Larry Bellehumeur
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65 Comments
Aug 22 02:26 PMSurfgrrl - the quick answer is that it shouldn't have a huge impact on the company's overall earnings. Venezuela was responsible for about 1% of its sales in 2007, and it was actually slightly down from 2006. At most, it might subtract about 4 to 5 cents off of the 2009 Earnings expectation for the ADR, so about 50 to 75 cents off of the Price target. Still makes it a good buy.....
Gato (or can I call you Cat) -- I know that BCH only pays dividends once a year, so this often throws off how many web pages reports its yield. I chose one of the more conservative ones, as the dividend is not like most stocks who maintain it. The Board tends to approve the number based on a year to year, and does not always try to increase it from year to year like most companies. As well, it used to be that some of the dividend (when I owned it a while back for sure) was paid in Shares, which could mean that the lower number reflects the cash only, and the higher number reflects both shares and cash. Either way, it is a generous dividend, and definitely makes this stock an attractive buy.
Cheers
Larry
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Mr Ed
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15 Comments
Aug 22 03:46 PM-
Larry Bellehumeur
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65 Comments
Aug 22 04:34 PMThat is an interesting point, and one that does have some merit. My only concern with that approach is it depends on the type of fund that you are looking into. Most mutual funds tend to not want to "rock the boat" by holding something that could expose them to the chances of vastly underperforming the market. Therefore, they all tend to hold the same batch of stocks, just in slightly different weightings. If one were to choose one of those, then they are better off in a wide-spread ETF.
In terms of individual investors, one advantage that they would have (unless we are talking about a mega-rich person) is that they are able to use more flexibility by taking positions in stocks that pros might not be able to (due to lack of liquidity needed for them to take substantial positions or due to not being able to stray away from the core focus of their funds). If used properly, this is a huge advantage for the retail investor.
However, if they are not willing to put in the time or effort, you are absolutely correct....
Cheers
Larry
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marcos1984
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1 Comment
Aug 22 10:25 PMIm a amateur investor from Australia, like yourself i have some family from Chile who have shown me that it isnt a stereotypical latin country being ruled by an iron fist.
If i want to gain some direct exposuer to these companies what would you recommend? (obviously it would be general advice)
I think your onto something with these companies think you wrote a sound and informative article.
Would appreciate your help
Mark
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Larry Bellehumeur
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65 Comments
Aug 23 12:23 AMIn terms of Chile, I also once believed that it had a reputation for corruption, like many countries in South America. That couldn't be further from the truth.....while it has had some issues in the 70's, it is now a very safe place to invest, and prosper.
FYI -- I've made some good money over the years, owning Aussie stocks. From Macquarie Infrastructure, to BHP Billiton to Commonwealth Bank, I've been happy with the performance for sure!
Cheers
Larry
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ksmithdc
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92 Comments
My Website
Aug 23 09:31 AM-
User 138602
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129 Comments
Aug 23 10:16 AMTilapia
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ddt
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2 Comments
Aug 23 11:31 AM-
Larry Bellehumeur
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65 Comments
Aug 23 05:52 PMHere are some quick thoughts on the company, from its stats:
1) Decent RoE of 16+% means that they should grow organically
2) Payout Ratio for their Dividends seems a bit high (about 70% for
2008, according to Yahoo) for a company that is still trying to grow
3) The Analyst estimates have been rising for both 2008 and 2009
earnings. This would carry a lot more weight if there was more
than one analyst covering the stock, though.
4) One thing that does scare me is how thinly traded it is...you weren't
kidding! This might lend to some extra volatility in the stock, which
can be good and bad....
Three other factors that you may consider:
1) As people get older, they tend to drink less (no more college dorm parties, I suspect), but they tend to drink better. This plays well in stocks such as Diageo, and should help VCO.
2) Emerging markets are starting to become purchasers of finer items, such as Coach Bags and Mercedes cars. This does play well into the luxury or upscales markets and should also benefit VCO
3) Chilean wines are starting to become more known in North America. I remember being in Toronto and there was a very large Chilean Wine festival.
Based on its numbers and the favourable demographics, this one should be a good long-term hold. You could probably get it at a lower price, I would suspect, as I think that smaller-cap stocks may still have a leg down. Try to see if it goes down to test its 52 week low, near $33 before stepping in.
I would also do some further research on its market share, and how it is fairing in different parts of the world. Because most of their growth is coming outside of Chile (their volumes are not growing domestically as fast as everywhere else), you may also have to watch how the Chilean currency performs against other large nations, as they will affect profit. Finally, a lower US dollars usually helps ADRs buyers.
ddt -- thanks for the heads up on NIHD. Looks like it might have some good upside, providing that you can handle the choppy ride....
Cheers
Larry
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User 138602
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129 Comments
Aug 23 06:50 PM-
Larry Bellehumeur
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65 Comments
Aug 23 08:27 PM-
RWilliams
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2 Comments
Aug 25 12:38 AM