Another Likely Winner From U.S. Nearshoring

At first, American companies were happy to outsource a lot of their labor and production to China...

The country had low costs, a large workforce, and a quality manufacturing sector. And that saved corporations billions of dollars.

Things changed when China started gaining a lot of leverage over the U.S...

See, in the decade leading up to the pandemic, China's economy was growing at a faster rate than the U.S. economy. Chinese GDP growth averaged more than 7% per year. The U.S. only averaged about 2% to 3% GDP growth. At the time, it looked like China might overtake the U.S. as the world's largest economy.

What's more, all that outsourcing meant China controlled a lot of our supply chains... from halfway across the world. We saw firsthand how problematic that was during the pandemic.

For many reasons, the U.S. government has grown weary of the economic risks associated with China. Politicians argued that we were too dependent on the nation. Back in 2018, the U.S.-China trade deficit peaked at $419 billion, meaning we were importing $419 billion more from China than we were exporting to it.

In recent years, though, the U.S. has started relying less on China and more on its closest neighbors... like Mexico.

As we'll discuss today, U.S. businesses are starting to move their operations in China closer to home... and that's good news for one business in particular.

Last year, Mexico surpassed China as America's No. 1 trade partner...

This is a big deal.

It was the first time in 20 years that the U.S. imported more goods from a country other than China.  China fell to second place behind Mexico... and almost dropped below Canada, which claimed third place.

Today, U.S. companies are looking to rebuild supply chains to make them more resilient. And there are a lot of reasons why Mexico makes sense...

In many cases, labor costs in Mexico are cheaper than in China. And when you take transportation costs into account... well, it's much cheaper to get goods from Mexico to the U.S. than it is to ship goods all the way from China to the U.S. It takes much less time, too.

It is reasons like these that pushed rail operator Canadian Pacific to buy its peer Kansas City Southern in 2021. The combined company, known as Canadian Pacific Kansas City (CP), or simply "CPKC," now operates the first single-line railway connecting Canada, the U.S., and Mexico. And it has plans to continue investing in its operations below the U.S.-Mexico border.

Retail behemoth Walmart (WMT) is also in the middle of a $1.5 billion store expansion in Mexico. And Tesla (TSLA) is planning to build a new $10 billion assembly plant in the Mexican state of Nuevo León.

So you see, money has been pouring into Mexico over the past few years. The International Chamber of Commerce predicts that, in 2024 alone, U.S. companies will invest $40 billion in Mexico.

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

Cemex is a Mexico-based building-materials company. It primarily distributes cement and ready-mix concrete to Mexico and the U.S.

With so much construction going on in both countries – and 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. We can see this by looking at Cemex's price-to-book (P/B) ratio...

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 a company's assets.

Currently, Cemex's P/B ratio is below 1 times. So not only are its assets priced near a 15-year low... but investors are pricing the company to be worth less than its assets.

Investors are missing the fact that infrastructure investments in Mexico are surging... to the tune of billions of dollars. That means Cemex's business should surge as well.

While the company's U.S. revenue only grew about 6% in 2023, its revenue in Mexico surged 32%. In other words, the company's future looks promising and profitable.

This is likely only the beginning of a multiyear growth period for U.S.-Mexico trade. Nearshoring efforts should continue to take off from here, which positions Cemex for strong, sustained growth.

For savvy investors, this could be a chance to jump in before valuations rise back to more reasonable levels.

Regards,

Joel Litman
March 11, 2024