Don't let it get away!
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Mexico's had a tough week. Last Wednesday, Mexican authorities discovered the body of murdered Santiago mayor Edelmiro Cavazos. This Tuesday, the United Nations declared Mexico "the most dangerous country in the Americas for journalists." Finally, just yesterday, Mexican marines reported finding a mass grave of 72 bodies, apparent victims of Mexico's ongoing drug violence.
These are just the latest tragedies in Mexico's multiyear war on its drug cartels -- a fight that pits Mexican authorities against, among others, the professionally trained paramilitary Zetas (who have since been accused of perpetrating the Cavazos killing). Just how sophisticated are the Zetas? A fascinating 2009 profile of the gang noted that they "employ a military grade arsenal ... with expertise in infantry squad tactics, complex assaults, and other military techniques."
This is serious stuff
From where I stand in the mid-Atlantic United States, this is one of the most underreported and least talked-about stories around (though both the Los Angeles Times and Dallas Morning News offer regular coverage for interested, English-speaking readers). And while this drug war has taken a massive toll on Mexico, with some 7,600 deaths in 2009 alone, investors in Mexico seem to have shrugged off the risk. According to our Motley Fool Global Gains database, Mexican stocks today trade for almost 17 times earnings and 2 times book value.
That's not cheap in a country that runs a very real risk of political and social instability.
This isn't to say that there are no opportunities in the Mexican economy. But investors should tread carefully and consider the implications of this situation.
For example, as a result of this headline risk, I've long tried to convince myself that Mexican airport operators Grupo Aeroportuario del Centro Norte (Nasdaq: OMAB ) , Grupo Aeroportuario del Pacifico (NYSE: PAC ) , and Grupo Aeroportuario del Sureste (NYSE: ASR ) are compelling value opportunities, given that they are essentially monopoly tollbooths trading for less than 10 times EBITDA. But I can't quite convince myself of that. If anything, I'm starting to conclude that they're actually value traps.
Consider, for example, the traffic trends that OMA has reported at its airports in Acapulco and Juarez -- one tourist city and one city at the center of the violence. International traffic to Acapulco is down 8% thus far this year, following a 25% decline last year (which was exacerbated by fears of swine flu). International traffic to Juarez is down 58% thus far this year, after last year's 34% drop. These are massive overall declines, and they could be leading indicators for the industry if violence continues and coverage of the violence increases.
That's not to say these declines would be logical or even warranted. The current State Department travel warning for Mexico says explicitly that "Millions of U.S. citizens safely visit Mexico each year" and "Resort areas and tourist destinations in Mexico do not see the levels of drug-related violence and crime reported in the border region." That said, tourist travel is discretionary spending, and one of the elements of a successful vacation is safety -- which makes headline risk relevant to the story here.
The case underlying OMA, which operates Monterrey's airport, is slightly different. That airport benefits from more stable, business travel traffic, much of which originates from within Mexico. That said, the level of violence in Monterrey, long considered one of Mexico's safer cities, is on the rise. Not only is Santiago, where Edelmiro Cavazos was mayor, just outside of Monterrey, but the Zetas have recently been barricading major roads leading in and out of Monterrey, to demonstrate just how much power they could wield over the city. Further, three security guards for FEMSA (NYSE: FMX ) , a Monterrey-based soft drink and beer bottle company and the operator of fast-growing convenience store chain Oxxo, were shot earlier this week in what may have been an attempt to kidnap one of the company's executives. With more episodes like that, the corporations that call Monterrey home could opt to move, fearing for the safety of their staff. The State Department has already authorized employees stationed in northern Mexico to send their families back to the States.
Don't write off the whole market
Drug violence in Mexico is a real and growing problem that is not getting enough coverage here in the U.S., and it has important implications for investors. That said, while Mexico's risk profile is significant, and I'm not too interested in investing in the country's airports, the country is not without its investing merits.
In fact, now is a good time to put high-quality Mexican companies such as FEMSA and America Movil (NYSE: AMX ) on your watch list, since it's inevitable that Mexico's rising risk profile will eventually spook investors and spark a sell-off of these stocks. Unlike the airports, these two Mexican companies operate in defensive growth industries (telecom and consumer staples, respectively) and have a presence across Latin America. Thus, violence in northern Mexico should not have such a negative impact on their underlying operations. If anything, it may actually give you a chance to be opportunistic.