3 Plays for Mexico's Surging Exports

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By David Sterman

NEW YORK ( StreetAuthority) -- Every few weeks, another major manufacturer announces plans to shut down production in China and bring jobs closer to home. Some companies such as GE ( GE) aim to boost production in the U.S. (GE will make hot water heaters in Kentucky, for example). That's because China is no longer the bargain it once was, thanks to a rising minimum wage and a strengthening currency. It's important for investors to be aware of this trend, because economists say it will only build in the years to come, as China's wages and currency are expected to rise even higher.

Perhaps the greatest beneficiary of this trend will be Mexico, which will always remain a low-cost environment for manufacturers. Since the North American Free Trade Agreement was ratified in 1994, Mexico has seen a steady rise in goods shipped north of the border. More than 70% of Mexico's exports head to the U.S., and that figure is expected to hit 75% in 2012. It's telling that even as global economies slumped in 2011, Mexico's exports still rose 13% to $336 billion, according to the CIA World Factbook.

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Perhaps the clearest sign of increased economic activity can be seen in airport traffic. Aeroportuario del Sureste ( ASR), which operates nine regional airports, recently announced that passenger traffic rose 10% in January from a year earlier. Business executives scoping out new manufacturing opportunities are likely part of that spike.

Rising exports are creating myriad benefits from Mexico. First, thousands of workers are finding jobs in factories each year, pushing them from subsistence living into the lower middle class. That boosts demand for all consumer-facing businesses. Second, the firms that transport goods are seeing a rise in business. Lastly, the government is able to secure rising tax receipts, crucial when you consider that government-owned energy giant Pemex is seeing falling output in key energy fields, leading to reduced remittances to the government.

These three investments are a great way to play the surging Mexican export sector.

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1. Celadon Group ( CGI)

This U.S.-based trucking and logistics firm operates six freight terminals across Mexico, augmenting its 11 terminals spread across the United States and Canada.

Moving goods across the border used to be quite costly for Celadon (and its customers), as Mexican drivers were prohibited from driving freight more than 16 miles into the U.S. Thanks to new legislation enacted last spring, that restriction has been dropped, helping Celadon and its peers to better compete with rail-focused freight carriers.

Sterne Agee calls Celadon a "prime way to invest in the re-energized Mexican manufacturing economy." The firm expects the lower costs associated with Mexican border-crossing arrangements to steadily boost profits. They estimate Celadon's operating profit will rise from $23 million in fiscal (June) 2011 to $35 million this year and $44 million in fiscal 2013. Shares have posted a recent rebound but still remain roughly 20% below Sterne Agee's $18 target price.

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2. NI Holdings ( NIHD) This company, formerly known as Nextel International, is a major wireless phone service provider in Mexico, Brazil, Peru and Argentina. Its push-to-talk service has made it a big hit with business customers, helping NI Holdings to garner an industry-leading $50 in monthly average revenue per user. The company's focus on corporate customers should continue to pay off as more multinational firms develop facilities in the region.

NI is now investing in 3G spectrum in each of these countries in order to tap into data-happy consumer markets. Meanwhile, shares have fallen almost 50% from their 52-week high on fears that price wars will sap margins. The company's decision to ramp up marketing expenses to maintain market share didn't sit well with investors, though. Yet a recent spate of insider buying helps underscore the notion that profit fears may be overblown. Six insiders bought a collective $2 million worth of stock in the past two months. Analysts note that at less than four times trailing EBITDA, NI Holdings is the most inexpensive stock in its peer group.

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3. Grupo Televisa ( TV)

This media firm has seen its shares drift from $30 to $20 in the past five years, even as its long-term outlook has never been brighter. A rising middle class that is being created from all of the new manufacturing jobs is helping boost ad rates for firms like Televisa, which is the largest producer of Spanish language content in the world.

Televisa is also looking to tap into the English-speaking Hispanic market in the U.S., as second-generation Mexican-Americans seek more programming in English. That's a wise move, because the Latino portion of U.S. society is the fastest-growing demographic group. Televisa's exposure to Spanish speakers and English speakers helps create a broader and more compelling platform for advertisers that want to develop cross-border ad campaigns.

Risks to Consider: When the U.S. sneezes, Mexico catches a very bad cold. The country's economy is increasingly dependent on the U.S. for trade, and a slowdown in economic activity here would be deeply felt across the border.

Action to Take --> All three of these companies stand to benefit from Mexico's coming growth spurt. Investors that simply want broad-based exposure to the economy should consider a low cost exchange-traded fund such as the iShares MSCI Mexico Investable Market Index ( EWW). The Global X Mexico Small Cap ETF ( MEXS), which was launched last spring, has a very appealing focus on Mexico's smaller, faster-growing companies. This ETF is still too illiquid and immature to recommend at this point -- but surely worth monitoring.

>>To see these stocks in action, visit the 3 Plays for Mexico's Surging Exports portfolio on Stockpickr.

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  • This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.