American investors looking for investments in emerging markets don't have to stray too far from home. Mexican stocks offer a unique opportunity to benefit from an emerging market with a growing consumer class, and an increase in the value of the Mexican peso against the U.S. dollar.
America Movil as a top stock in Mexico
America Movil is the largest wireless carrier in Latin America, benefiting from economies of scale in major markets, though Mexico is by far its most important. The company generates approximately 30% of its wireless sales in Mexico, taking a 65% share of the domestic wireless business. This scale gives it a massive competitive advantage over smaller operators.
In all, America Movil has approximately 73.3 million wireless subscribers in Mexico, with roughly 83% of these subscribers using prepaid services. However, its subscriber base is shifting to stickier postpaid mobile contracts, which grew 6.6% in the most recent quarter, compared with a 0.3% decline in its larger prepaid business. Mexico is a wildly profitable geography for the company, generating EBIT margins in excess of 20%, thanks to its ability to spread out fixed costs across a greater number of subscribers.
Of course, rampant success draws the eyes of competitors and regulators. Some investors are worried about regulatory conditions in Mexico, as regulators have taken aim at America Movil because of its favorable competitive position as the largest wireless carrier. While it is a risk to the thesis of investing in the company, it also reflects the tangible benefits of scale. Regulators don't take aim at small, unprofitable companies with no pricing power. Perhaps the greatest sign of a good business is that regulators worry you're making too much money.
In a business where scale is truly everything -- the telecom industry naturally consolidates to only a handful of competitors in virtually every market around the world -- America Movil's scale and predictable earnings power and free cash flow generation make it an attractive way to bet on growth in Mexico and Latin America as a whole.
Wal-Mart de Mexico is a nearly pure bet on growing consumption in Mexico
Established retailers are one of the best ways to play a rising consumer class in Mexico, and Wal-Mart de Mexico is deeply entrenched in the local retail business. Wal-Mart Stores, Inc. (NYSE:WMT) owns about 70% of Wal-Mart de Mexico. The remaining 30% is traded on public securities markets in Mexico, and over the counter in the United States.
Wal-Mart de Mexico gives investors a way to invest in the growth of the Mexican economy and consumer class directly. As of Sept. 30, the company operated roughly 3,100 stores, generating approximately 81% of its sales in Mexico, with the remainder coming from Central America. Here's a map of cities in which Wal-Mart de Mexico has stores.
One thing that I like most about Wal-Mart de Mexico is its opportunity to capture significant share of a budding e-commerce market. Relative to the United States, where e-commerce is more established and the winners and losers are all but decided, online sales in Mexico are much more fragmented.
The leaders in e-commerce have only a small share of the e-commerce business. Amazon.com, MercadoLibre, and Wal-Mart de Mexico lead in Mexico's e-commerce marketplace, with 7%, 7%, and 4% market share, respectively. The other 82% of the pie is split among a long list of smaller players, share that is ripe for the taking by the biggest three retailers.
The online retail business is very different in Mexico from what's in the United States. Because basic banking services aren't widely used in Mexico -- less than half of all adults have a credit card, for example -- roughly half of e-commerce transactions are paid for with cash when the products are picked up in person. This stands in stark contrast to the United States, where home deliveries are far more popular than "site to store" options.
Online sales make up only about 3.5% of total retail sales in Mexico, compared with 9% of retail sales in the United States. Some projections call for online sales in Mexico to grow at greater than a 20% clip for years to come, given that the market is growing off a very small base.
I view Wal-Mart de Mexico as a stock with nearly pure exposure to brick-and-mortar retail in Mexico, with the option to capitalize on one of the world's fastest-growing e-commerce industries, making it an attractive way to bet on the United States' southern neighbor.