FA Alpha Daily

America has a new primary trading partner

As Mexico’s trade relations with the U.S. enter a new era of profitability, Cemex (CX) finds itself poised for a period of sustained expansion, driven by the relentless march of nearshoring initiatives. Despite signs of growth, investors remain wary, as evidenced by Cemex’s subdued valuation metrics. In today’s FA Alpha Daily, we delve into the possible potential of Cemex as it capitalizes on the soaring demand driven by the cross-border construction boom.

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China has been the economic elephant in the room for decades…

U.S. corporations have eagerly outsourced extensive labor and manufacturing to China, attracted by lower costs, while politicians have expressed increasing concerns. The savings for companies translated into significant leverage for China.

China’s economy was accelerating at a pace that threatened to surpass the U.S., at least until the pandemic hit.

Moreover, China’s control over numerous supply chains—positioned a world away—played a significant role in the devastating supply chain disruptions witnessed during the pandemic.

This vulnerability wasn’t a newfound revelation; indeed, it was a cornerstone of President Donald Trump’s 2016 election campaign.

China was amassing a formidable trade surplus with the U.S., absorbing American dollars with no immediate remedy in sight.

The ensuing “trade war” saw the U.S. deficit with China hitting a peak of $418 billion in 2018, indicating a massive imbalance in trade.

To counteract this, President Trump initiated significant tariffs on Chinese imports. However, the pandemic inadvertently accelerated a shift, reducing U.S. dependence on China in favor of closer trading partners.

Last year marked the first in two decades that a nation other than China became the primary source of U.S. imports, a milestone.

Businesses in the U.S. are now eyeing opportunities closer to home.

Last year Mexico became America’s largest importer for the first time in two decades.

China almost fell below Canada, but just barely kept its 2nd place position.

As U.S. companies look to rebuild supply chains to make them more resilient, they are finding a lot of reasons why Mexico makes sense.

Labor there is cheaper than it is now in the coastal areas of China, and when you take into account the cost of transportation, it beats the cost from the Chinese hinterlands as well.

It is reasons like these that helped push rail operator Canadian Pacific (CP) to buy Kansas City Southern in 2021 and to continue to invest in its operations below the borders.

Since then, a lot of money has poured into Mexico. Mexico Pacific is building a $15 billion natural gas pipeline that will export 2.8 billion cubic feet per day. Tesla (TSLA) plans on building a $10 billion Tesla gigafactory in Nuevo León.

It is projected that United States businesses will invest up to $40 billion in Mexico in 2024 alone.

This setup is perfect for companies like Cemex (CX)…

Cemex is a construction material company that primarily distributes cement and ready-mix concrete to Mexico and the U.S.

With so much construction going on in both countries, especially near the border, it is perfectly positioned to benefit from U.S. nearshoring efforts.

However, investors seem to be pricing in a different story.

When looking at the company through valuation metrics such as uniform price-to-book (P/B) ratio, Cemex is currently trading near its 15-year low.

The P/B ratio compares a company’s total value with the value of the assets on its balance sheet (or “book”). The higher the P/B ratio, the more investors are willing to pay for the company’s assets.

Currently, Cemex’s P/B ratio is below 1 times, meaning that its assets are not only priced low but that investors are pricing the company to be worth less than its assets.

Even though Mexico’s infrastructure is surging, investors don’t seem to be paying attention.

While Cemex’s U.S. revenue grew 6% in 2023, its revenue in Mexico grew by 32%.

This is very likely only the beginning of a multi-year growth period for Mexico’s trade with the U.S.

This positions Cemex on a trajectory of strong, sustained growth, fueled by the growing trend of nearshoring among U.S. companies. The company’s future looks promising as it capitalizes on these developments.

For savvy investors, this could be a chance to jump in before valuations rise back to 1 times or higher.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research

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