Emerging markets have taken a hit recently on signs of capital fleeing these economies. Some countries in particular have felt the pressure, especially Turkey, Argentina, and South Africa; these countries have seen their currencies drop more than 10% in a few days while their interest rates spiked. However, Mexico has largely missed out on this correction. The Mexico IPC index is down 6% year to date, while the Mexican peso is 2.7% down; this is better than most of its emerging peers.
There is still not enough evidence to prove the country is heading for a slowdown yet. In fact, Moody's upgraded Mexico to coveted A-grade sovereign rating on Feb. 5, allowing the country to access credit at reasonable rates if necessary.
Is it time to start a position in Mexican assets, though? Let's analyze these three Mexican ADRs.
Weak performance
First off is America Movil (AMX 2.87%). The company dominates Mexico's wireless market with roughly 70% share, and has predominance in Brazil and Colombia as well.
The third quarter brought flat overall results for America Movil as revenues only grew 0.7% year over year. Mexico showed weak results, as it suffered a 2.1% decline in service revenue. According to the company, this was attributed to the "weak state of the economy." The company does not see much dynamism in the country. Mexico accounted for almost 30% of the company's total revenue this quarter, so its evolution is critical for the company.
Lately, there has been an extra factor adding volatility to the stock. Recent news reports have speculated that Spanish telecom Telefonica (TEF 1.19%) was structuring a joint offer to take over Brazilian mobile operator Tim Participaçoes and break it into pieces that would be partially absorbed by America Movil among other operators. Brazilian antitrust regulator Cade is likely to allow the sell of Tim as a whole, however, and allow it to be sold to a new operator. The future is hard to predict, but the disruption in this market would certainly have an effect on the share prices of the wireless carriers operating in Brazil.
Record traffic
Next, let's look at Grupo Aeroportuario del Sureste (ASR 0.35%), or ASUR. This company operates nine of Mexico's privatized airports, capturing around 23% of the country's total air passenger traffic.
This company is not doing bad, as passenger traffic for January was up 9.1% year over year.
ASUR's two main characteristics, geographic monopoly and high operating leverage, are on its side and allows it to gain strong sustainable profits. Two-thirds of ASUR's total sales come from government-regulated fixed fees charged to airlines and passengers to use the facilities. The government's regulation of passenger fees puts a cap on profitability, however, with the extra ingredient that rates are adjusted every five years.
Here's the key: Cancun International Airport was responsible for 76% of the company's total traffic this quarter. As you might guess, this traffic is mostly driven by tourism. Considering that ASUR posted record traffic for 2013 and that traffic is still growing for the company, there are not indicators showing a slowdown in this business.
Soft performance in Mexico
Finally, there's the world's largest producer of ready-mix concrete and an important player in the cement industry: Cemex (NYSE: CX).
Third-quarter earnings brought $4 billion in consolidated net sales, up 3% year over year. This was driven by higher pricing in Mexico and higher volume in the U.S. and other markets. Mexico, however, missed out. Elections in mid-2013 put some of the government infrastructure projects on hold and cut the sale of bagged cement to social programs. Gray cement volumes dropped 13% there, while they grew 7% in America.
Earnings for Cemex will be determined largely by demand for construction materials in the markets it serves. Since Mexico accounts for nearly half of the company's total EBITDA, how the economy evolves in the country is crucial. Lately, demand in Mexico has not had the best performance. The country was responsible for 20% of total net sales this quarter, while northern Europe did much better with 29%. However, Cemex still enjoys great profitability in Mexico as it possesses long-term and low-cost fuel and electricity contracts.
Final thoughts
America Movil's sales in the country are not showing growth, and the company is highly exposed to the region, which is on its way to a correction. The changes within the Brazilian market will have an impact, especially if new competition enters this market. Stay tuned.
In the case of ASUR, the main source of traffic (foreign tourism) is not significantly correlated to the country's internal level of economic activity. And, the outlook for foreign tourism to the country is stable and, in fact, it could improve if the drug-related violence cools down. Plus, a cheaper peso could be beneficial for the company in the short term and drive more traffic.
Cemex has operations outside Mexico but still maintains a significant portion of its businesses in the country. Government spending is getting back on track, so local sales will hopefully make improvements.
