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It's been said plenty of times that our neighbor to the south is home to a burgeoning, debt-light economy that offers emerging-market growth with an element of domestic risk and valuation. China is very much "last season" when it comes to manufacturing, and Mexico offers a fantastic answer, with geographical superiority and an eager work force. One company based in Mexico, Empresas ICA (NYSE: ICA ) , is a heavy-construction firm with a market cap of $1 billion that was as recently as April worth nearly $2 billion. The causes for the haircut includes a collapsed deal and lousy first-quarter earnings. But with a strong outlook for Mexican infrastructure spending, and an apparent case of market negligence, Empresas ICA might be an undervalued pick with substantial upside potential.
Recently elected Mexican President Enrique Pena Nieto holds infrastructure investments as a top priority for his administration. In fact, his proposed 5% of GDP plan represents one of the largest national undertakings in more than 20 years. Using current projections (recently revised down) of 3.5% GDP growth, Mexico should have a GDP of $1.196 trillion. Five percent of that amount, $59.79 billion, is theoretically allocated toward infrastructure improvements -- 12% of which is directly allocated to transportation enchancements.
Empresas ICA is the largest construction company in Mexico. Now, that doesn't mean $7 billion will be funneled into the company this year, but it's useful as an illustration of the macro environment supporting Empresas. Even more so, considering the company's stock price was nearly cut in half over a period of eight weeks.
The Mexican government plans on a buildout of a new rail system for 1,000 miles, thousands of miles of road improvements, new airports, and ports.
Empresas ICA showed some poor numbers in its first-quarter earnings, with a 31% drop in revenue, year over year. The company was also set to sell its homebuilding segment to Servicios Corporativos Javer, a huge private builder -- sending the stock down another 10 points.
Macro events, of course, can't dictate the entirety of an investment thesis. Empresas has a so-so balance sheet, with more than $3.2 billion in long-term debt and just $608 million in cash. On the flip side, the company generated nearly $387 million in free cash flow last year, indicating that it should have little trouble meeting creditor payments.
In addition to its operating cash flows, the company recently sold its nearly 19% stake in Red de Carreteras de Occidente -- the rights holder and operator to nearly 500 miles of highway in Mexico. The deal will give the company roughly $380 million as part of its asset recycling process.
For a quick comparison, take a look at U.S.-based Mastec (NYSE: MTZ ) , which trades at just under 13.75 times forward earnings yet holds a more conservative balance sheet and is a good bit larger at a market cap of $2.34 billion. While Mastec is building out its operations in Canada, Empresas offers potential outperformance by virtue of its market dominant position in Mexico.
Empresas ICA appears to offer investors shares that are priced to move and a business that is set to grow.
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