Mexican Airports- PAC, OMAB, and ASR

[KJP]

 

 

For sure. But does the currency risk matter in the 5-10 year time frame? I know it has been hit hard in the last couple of months, but doesn't that even out over time?

 

 

Here's a 25-year chart of the Mexican peso versus the USD:  https://www.macrotrends.net/2559/us-dollar-mexican-peso-exchange-rate-historical-chart

 

I don't see it evening out over time. 

 

More broadly, I've seen many pitches that try to compare growth rates, FCF yields and multiples of emerging market companies in their domestic currencies to companies in the same industry in the US trading at much higher multiples.  On the surface, the EM company looks much more compelling, but if you eat USD (or yen or Euro) how much are you actually going to get at the end of the day if you have a long-term currency chart that looks like the peso?

 

I've haven't looked at the Mexican airports specifically, and I agree that airports (if they aren't overlevered right now) are usually good businesses.  So, the comment above ultimately may not apply to them.  But I do not think you can safely assume that currency moves will just even out in the end. 

[bergman104]

 

 

For sure. But does the currency risk matter in the 5-10 year time frame? I know it has been hit hard in the last couple of months, but doesn't that even out over time?

 

 

Here's a 25-year chart of the Mexican peso versus the USD:  https://www.macrotrends.net/2559/us-dollar-mexican-peso-exchange-rate-historical-chart

 

I don't see it evening out over time. 

 

More broadly, I've seen many pitches that try to compare growth rates, FCF yields and multiples of emerging market companies in their domestic currencies to companies in the same industry in the US trading at much higher multiples.  On the surface, the EM company looks much more compelling, but if you eat USD (or yen or Euro) how much are you actually going to get at the end of the day if you have a long-term currency chart that looks like the peso?

 

I've haven't looked at the Mexican airports specifically, and I agree that airports (if they aren't overlevered right now) are usually good businesses.  So, the comment above ultimately may not apply to them.  But I do not think you can safely assume that currency moves will just even out in the end.

 

That's an excellent point that I had not considered. Looks like if the long term trend holds, then currency exchange would pretty significantly eat into USD profits.

[Cigarbutt]

^At first glance, investing in Mexican airports, especially at this point, appears ballsy. Good luck.

Something to consider if you want to play this: it seems ASR, because of the larger exposure to international travel and tourism, has the most to lose in the short to mid term but it (if it) stands to gain the most when the global economy recovers while the peso depreciates.

[SharperDingaan]

ahhh yes, Peyto and Whitecap. Silly me for not realizing every widow and orphan places such beacons of business quality and stewards of shareholder capital in their portfolio alongside their Berkshire Hathaway, Nestle, Johnson & Johnson and Microsoft.

 

I guess we'll go with answer B.

 

B) have a different definition of “best of breed”

 

high quality, best of breed, widow and orphan stock are not adjectives I would use to describe companies where the only question is if they survive. guess that's what makes a market.

 

Too bad you couldn't bother to look at some of the other exchanges, or over a time frame longer than 3 months.

 

SD

 

 

[arcube]

ahhh yes, Peyto and Whitecap. Silly me for not realizing every widow and orphan places such beacons of business quality and stewards of shareholder capital in their portfolio alongside their Berkshire Hathaway, Nestle, Johnson & Johnson and Microsoft.

 

I guess we'll go with answer B.

 

B) have a different definition of “best of breed”

 

high quality, best of breed, widow and orphan stock are not adjectives I would use to describe companies where the only question is if they survive. guess that's what makes a market.

 

+1. I would stay away from any Western Canadian O&G names for the foreseeable future.

[bergman104]

^At first glance, investing in Mexican airports, especially at this point, appears ballsy. Good luck.

Something to consider if you want to play this: it seems ASR, because of the larger exposure to international travel and tourism, has the most to lose in the short to mid term but it (if it) stands to gain the most when the global economy recovers while the peso depreciates.

 

Thanks for your thoughts. I agree with some of the previous posts that currency risk and the duration of COVID seem to be the biggest sticking points.

[samwise]

thanks for bringing up the idea. The risks below are just from a quick read. Please correct me if I am wrong here.

 

The major risk, as you said, is regulation. And the new president of Mexico may not be friendly in the setting of next 5 year plan and rates. It can be taken back or transferred, and in the best case will end in 28 years.

 

The other risk is that this is a concession, so not sure you should think of it as a compounder.  Are you sure the stock should be more valuable after 10 years? Possibly air travel will grow (after COVID), but the remaining cashflows will be only 18 years. Seemingly sure-shot contracts can end painfully as Neustar found out. https://www.reuters.com/article/us-usa-neustar-fcc/neustar-faces-loss-of-contract-after-fcc-staff-recommendation-idUSKBN0M02E220150304

[thepupil]

Too bad you couldn't bother to look at some of the other exchanges, or over a time frame longer than 3 months.

SD

 

yep, it sure is a shame. I haven't been looking at any ideas or posting about any companies/ideas over these past few months. just can't be bothered. just too lazy and my time horizon is simply too short.

 

if only i worked as hard as you and found and posted about all those super high quality easy multi-baggers for the benefit of the group.

 

if only i could inspire others by somehow making 3x year to date swing trading the market.

 

I'm just not as smart as you. I don't possess your alchemist like trading skills that turn the dogshit canadian energy stocks that you post about into ridiculous gains.

 

One day, maybe I'll learn, maybe if I look at those other exchanges.

 

What exchanges would you suggest as a start? enlighten the mortals among you.

 

Just so that it might inspire others ...

 

My partners and I have done very well swing-trading the markets. So far we're up roughly 3x YTD, on a little skill, and mostly luck.

Comes normality again, the cash yield on our FI portfolio will be beyond stupid.

 

 

 

 

[SharperDingaan]

You asked for value proposition, I just refused.

Could care less what others think.

Have a good day.

 

SD

[thepupil]

silly me for asking for investment ideas on an investment forum when someone said they had better ideas.

 

this follows a consistent pattern of you playing it close to the vest when asked for more information. again, unless something is illiquid, I do not understand why one would not share their ideas or strategies. if you already have a position on, it is in your interest to share.

 

https://www.cornerofberkshireandfairfax.ca/forum/general-discussion/what-is-considered-a-win-for-trading-inout-sp500/msg398903/#msg398903

 

I have never understood your posts and not wished to to discuss until now. Resuming the prior policy.

 

To be clear, I am not trying to claim superiority. I have lost a lot of money this year and you can see why from the things I post about. you are apparently up 3x and all your positions are house money. I have no clue how and I have concluded that that will remain the case.

 

apologies for filling up the airport thread here.

[formthirteen]

These stocks seemed interesting until I had a look at the attached USD vs Mexican Peso graph.

[Spekulatius]

These stocks seemed interesting until I had a look at the attached USD vs Mexican Peso graph.

Another way to look at this is that interest rate for MXN is currently 6.5% vs nearly zip for USD or Euro. This means that forward looking Mr Market expects the Peso to lose ~6% annually relative to the USD or Euro.

[Pelagic]

Read through this this morning, thought I'd share it here. A decent industry primer on airports if nothing else.

 

https://www.broyhillasset.com/wp-content/uploads/2020/08/BAM-Airport-Thesis-2020.08-FINAL.pdf

[samwise]

Read through this this morning, thought I'd share it here. A decent industry primer on airports if nothing else.

 

https://www.broyhillasset.com/wp-content/uploads/2020/08/BAM-Airport-Thesis-2020.08-FINAL.pdf

 

Thanks for sharing. It is ultimately a bet on the underlying passenger growth, translating into profits in a good regulatory environment.

 

There are other bets exposing you to the same underlying passenger growth: TDG and HEI (and PCP within BRK, although that is more sensitive to new plane deliveries I think). Another option is to buy the loyalty programs, although those have turned out to have their own risks.

 

So given these choices, why would one favor the Mexican airports today?

1. They are cheaper on EV/EBITDA apparently

2. They are exposed to regulatory risk

3. They have a limited life on the concession (~28 years), vs say TDG which has a 70 year life once a part is accepted as part of an aircraft design.

4. They are not diversified over global passenger miles, so there is country specific and even city/airport specific risks.

5. As hard assets in emerging countries, they face expropriation risks.

[Gamecock-YT]

Airports always seems like you are going to beholden to bureaucracy.

[Broeb22]

You can pick any LatAm "moaty" company today and they will be cheaper than comps elsewhere.

 

Coca-Cola Femsa (KO Bottler), Arcos Dorados (MCD Master Franchise), Grupo Televisa (cable and broadcast TV conglomerate) are just a few off the top of my head which would fit this description.

[samwise]

You can pick any LatAm "moaty" company today and they will be cheaper than comps elsewhere.

 

Coca-Cola Femsa (KO Bottler), Arcos Dorados (MCD Master Franchise), Grupo Televisa (cable and broadcast TV conglomerate) are just a few off the top of my head which would fit this description.

 

Why is that? Currency devaluations , inflation , or something else?

[Spekulatius]

You can pick any LatAm "moaty" company today and they will be cheaper than comps elsewhere.

 

Coca-Cola Femsa (KO Bottler), Arcos Dorados (MCD Master Franchise), Grupo Televisa (cable and broadcast TV conglomerate) are just a few off the top of my head which would fit this description.

 

Why is that? Currency devaluations , inflation , or something else?

 

In my opinion, it is a higher country risk premium. Or look at the central bank interest rate (I wouldn’t call it risk free), it is currently at 4.5%. Brazil is in a very similar situation.

https://countryeconomy.com/key-rates/mexico

 

FWIW, these countries stock markets are interesting, because those rates are coming down. That should boost equity valuation, but may also weaken the currency.

[Broeb22]

You can pick any LatAm "moaty" company today and they will be cheaper than comps elsewhere.

 

Coca-Cola Femsa (KO Bottler), Arcos Dorados (MCD Master Franchise), Grupo Televisa (cable and broadcast TV conglomerate) are just a few off the top of my head which would fit this description.

 

Why is that? Currency devaluations , inflation , or something else?

 

It’s probably a number of factors but some include currency devaluations (which hurt quite a bit if the entity has USD denominated debt), perceptions of lower political and economic stability (due to dependence on oil or other more commodity-type exposures), lower quality mgmt./governance on average in EM companies.

 

There is some truth to these, but I do think they are a little overblown. Looking at the stock charts of most EM public companies traded on US exchanges, this is a great example of investors paying peak multiples of peak earnings in the 2011-ish period for the same businesses operating in the same historical political and economic environment that they are now, except now we’re seeing very low multiples of low (currency-depressed) earnings.

[samwise]

Thanks both. I also looked at ambev. The price in USD seems to have peaked in 2013-ish, about the time you said people were paying peak multiples. That’s a long time to wait.

 

Seems investors will always be battling currency headwinds. So for a foreign investor there may be no growth.

[SharperDingaan]

What's the rush ???

 

Mexico, LatAm, SA, etc. all have Covid-19 ... and are less able to deal with it than the US is. The US is also largely where it is, because of incompetence - which may well change from December onwards. Relative to the US - Mexico, LatAm, SA should be significantly devaluing as time goes on. Maybe 15-20% over 1 year?

 

Airlines have to 1) get people flying again, and then 2) get people flying to Mexico, LatAm, SA, etc. How are people going to pay for those flights? US trial balloons have favoured tax credits for DOMESTIC travel/tourism, NOT international - winter sun breaks in the US, not Mexico of SA. Sure, there will be more flights - but Mexican/SA growth will depend primarily on DOMESTIC travel/tourism. Minimal growth for 1 year?

 

1 year out you KNOW if more people are flying again, AND where they are going. Devaluation has also very likely lowered the (USD) share price quite a bit. You will also know if airports are STILL the best infrastructure opportunity for your $.

 

Just sit on your ass for a year, and let the thesis both evolve and de-risk.

 

SD

 

 

 

 

[bizaro86]

Anecdote alert: I think Canadian tourism increasing will be a partial offset for Mexico. Many people I know (myself included) cancelled a winter holiday or spring break trip somewhere warm last year. If its possible to go go (no 14 day quarantine on return) people will want to. Given the situation in the US, Mexico seems relatively more attractive, so while the pie will be smaller they should have a bigger share.

[Spekulatius]

I own a bit of AMBEV (I actually added a hit last week). My thinking is that folks will drink beer again way before they fly. Nevertheless, the  Mexican airports are attractive because they have good balance sheets. They will make it too the other side without dilution.

 

The worst of the currency devaluation for the Latam currencies seems to be over already because the USD is silently devaluing too against most major currencies.

[SharperDingaan]

Just keep in mind that you can buy that balance sheet later at a lower price, and with more historic data points.

You also want SUSTAINED improvement, not just a short-term bump following border re-openings.

 

Devaluation is just getting started - if the USD has to debase by 15%, do you really think that the Mexican Peso is going to able to debase by JUST 15% as well? (to keep the USD/Peso FX rate the same). When competing countries are also aggressively devaluing to promote both exports, and domestic production, as much as possible? 

 

SD