Construction of the ‘Trump Wall’ begins
The construction of a border wall between the US and Mexico was one of the centerpieces of US President Donald Trump’s 2016 electoral campaign. Now, with engineers having begun the preparatory work for the border wall construction, getting the funding from congress is the last piece to the puzzle. Democrats have shown no sign of yielding on the issue yet, and already blocked the project once during negotiations over a government spending package last spring. However, the White House is pitching a new deal to have the necessary funds included in the budget this fall. If President Trump’s vision does take shape and form, what will investors be watching? If construction work picks up, it should lead to increased demand for construction and material industry products and services.
Consequently, for US investors, ADRs from Mexico’s material sector should command particular attention. The materials sector in Mexico has returned 17.4% YTD (as of August 10), led by Industrias Penoles SAB de CV, Cemex, and Mexichem, which is up 35%, 21%, and 20% respectively. Industry performance has been gauged from stocks that are part of the iShares MSCI Mexico Capped ETF (EWW). Though dividend yield from the sector stands at a dismal 0.79%, an attractive price multiple of 17.97 P/E serves as the high point for the sector.
From an investment perspective, forward valuations for Mexico’s material sector are currently attractive (see chart above), with a lower aggregate forward P/E trend line coupled with a rising forward EPS (earnings) trend line. We identified two stocks within the sector, that could be given particular attention.
CEMEX, S.A.B. de C.V. (CX)
This Mexican multinational building materials company manufactures and distributes cement, ready-mix concrete, aggregates, clinker, and other construction materials. Cemex also offers various complementary construction products and provides building solutions for housing projects, pavement projects etc.
The company has its ADR trading on the NYSE under the symbol CX. On a year-to-date basis, the ADR had returned 20.8% as of August 10. The stock trades at an attractive P/E of 13.83 as compared to the peer average of 17.97. The stock has received 82.6% BUY recommendations from analysts reviewing the stock.
Mexichem, S.A.B. de C.V. (MXCHF) (MXCHY)
Mexichem is a producer in plastic pipes, and one of the leading chemical and petrochemical companies. The company operates more than 120 production plants in over 30 countries and has a market value of about $6 billion. The company recently closed a deal to acquire 80% stake in the Israeli irrigation firm Netafim for $1.9 billion.
The company has its ADR trading on the NYSE’s OTC exchange under the symbols MXCHF and MXCHY. On a year-to-date basis, the ADR had returned 20.25% as of August 10. The stock trades at an attractive P/E of 14.69 as compared to the peer average of 17.97. The stock has received 84.2% BUY recommendations from analysts reviewing the stock.
