Quick trade idea: Bolsa Mexicana de Valores (BOLSA.A)
今度は今度。今は今。
In what has felt like forever, I’ve finally stumbled upon something interests me, as well as being potentially asymmetric to the upside.
I’ve recently been paying attention to the parabolic surge in silver, as well as copper, as well as the recent appreciation in the AUD, and began wondering if there are some less popular ways to participate in the rise in precious metals. More likely than not, the answer usually is to just slap on a nice COPX position and call it a day. But please humor me for a bit..
In that vein, color me ignorant, but I came to discover that Mexico is a global leader in silver and copper, being the largest silver producer, double that of runner ups i.e. China and Peru, as well as the tenth largest copper producer in the world. In fact, take a look at the share price performances of the country’s largest silver miner (Fresnillo), and largest copper miner (Grupo Mexico).
Overall, the Mexican stock market has been doing fantastic. The IPC Mexico has made new ATHs, and the EWW (measured in USD) had also just touched a new ATH.
Generally, I’m never to keen to own EM or LATAM stocks, apart from airports (one of the first few stocks I owned was Grupo Aeropuerto Del Sureste (ASR)), due to a lack of knowledge regarding the landscape and culture, as well as corporate governance that is more often than not, shoddy such geographies. Nevertheless, we have reasons that though largely consensus, appear reasonable i.e. that money will continue to seek refuge outside the US, and that the recent unprecedented run up in commodities lend a strong argument for why one should own something in LATAM.
For example, Brazil appears to be a popular choice (note I own BOLSY - their stock exchange) as commodities make up 60-70% of its exports and thus a commodity upcycle would hugely benefit Brazil.
Still, as we will explore in a bit, the absolute/relative cheapish valuation and divergence in performance of the Mexican stock exchange (BMV), relative to history, make it an asymmetric bet to the upside and therefore a favorable risk to reward, in my view.
This is not to mention that Mexico in general, on the Buffett indicator (Market cap to GDP ratio) is much lower than its peers - something like ~30% compared to Brazil ~50% and the US for example at >200%. Now the Buffett indicator for the US mainly, is really a dinosaur that belongs to the industrial days of America for obvious reasons we don’t have to discuss here. The absolute disparity noticeable between EM countries however, is worth taking note of.
There are a few writeups (here, here, here) that cover the business minutiae of BMV. In my piece, I’ll be approaching BMV from a different angle. Do let me know if there are areas you disagree on.
Quick Background
Before moving forward, for a quick background, BMV operates six key segments - equity trading, derivatives trading, OTC trading, capital formation, Central Securities Depository, and Information Services.
Its revenue composition is as follows (note growth has been strong over 9M25 across most of its segments):
As we all know, stock exchanges are fantastic businesses. They are asset light toll roads with incredible ROICs, and reflexive to their respective stock market cycles i.e. in bull markets whence trading volumes ratchet up and new listings come on, people conduct more trades, need more data, do more hedging - and the stock exchanges themselves earn more money without ensuing incremental costs i.e. all additional activity is pure margin.
In recent years however, growth has not been that great. The Mexican stock market had gone nowhere for basically close to a decade, firms had began to delist from the exchanges and new companies refused to raise capital in an equity market with such punitive cost of equity. Margins at BMV had also fallen from over 60% to a stable ~57% and thus EBITDA had not grown at all since 2021 (bear in mind).
However, on a capital allocation front, management had continued to payout majority of its profits to shareholders, via both dividends and share repurchases recently.
As illustrated below, the firm is FCF generative, generating US$100m FCF on average over the last couple of years and as seen in the cash from financing section, share buybacks really went into gear sometime in 2021-2022 and the firm had repurchased ~5% of its shares outstanding since. The dividend yield is at around ~6% at current share prices.
Why is it the right time to own BMV then?
#1 Exchange stocks have outperformed exchanges
As per the above, the Mexican stock exchange has appeared to break out of its long term range recently. On the back of a commodity upswing, assuming this continued outperformance in Mexican stocks holds, what could potentially be better way to participate, apart from holding a vanilla ETF.
One could own idiosyncratic minority stakes in various businesses but are then exposed to their ignorance of the competitive fields thereof, as well as corporate governance at the helm of these entities.
Instead, I saw this chart on X the other day, exhibiting the outperformance of exchange stocks over the exchanges themselves across the last decade.
Putting that mental model to the test, even looking at recent 1 to 3 year performances, the theory stands.
For example, the Brazilian ETF (EWZ) and Brazilian exchange stock have both moved in the same direction over the past year, albeit with the exchange outperforming (holding the above observation true). This relationship held across the past one to three year period.
On the other hand, whilst the BMV had not too shabby a year, its performance diverged from the Mexican ETF (EWW). And this was not because the BMV had performed super well prior. Quite simply, the EWW had broken out but the BMV remains stuck under an invisible ceiling.
The past year had actually been fantastic for anyone that has held stock exchanges. Regardless of social unrest, the TASE for example had outperformed massively, with its multiples expanding to nose-bleeding valuations presently. The SGX (known to be rather back-water), HKEX and Bolsa Columbia had all done well over the past year.
It’s not all sunshine and rainbows of course. There were poor performers i.e. the LSEG and ASX. The ASX did not perform too well over the past year. The FTSE did on the other hand. However, both started off with high multiples. The FTSE for example, saw multiple compression which offset whatever growth it had.
The exchanges that did well on the other hand, saw their multiples expand, on top of good performances.
#2 BMV and NAFTRAC are touching again
Studying the performance profile of the BMV and NAFTRAC (a portfolio of the 35 largest, most liquid companies on the Mexican stock exchange), my takeaways are as follows:
Over the past decade, the BMV had always traded at a return premium relative to the NAFTRAC
In recent years, whenever both lines touched, the BMV bounced and one would have made generally made money, even if for just a quick bounce. Past few times however, the BMV had stooped down to meet the NAFTRAC, whilst this time, the NAFTRAC has stepped on the accelerator pedal and gone up to meet the BMV.
The company had used this comparison as well in their own investor presentation, highlighting the closing performance gap between both entities, as well as how BMV’s multiples had compressed over the past decade.
#3 Trading activity is heating up in Mexico
Anemic markets have plagued Mexico over the past few years. There has been some recent hints of revival, most notably the public listing of Aeromexico which was well oversubscribed by institutions. Not too shabby for an airline listing.
Trading activity has also appeared to catch some steam as ADTV has picked up after a 2023 slum and retail accounts in Mexico had increased by more than eight times since 2021.
Transactions are also at a new recent high though traded values still remain below FY22 levels.
Before moving on, a detraction for owning BMV has been the advent of BIVA, a competitor in equities, back in 2018. With the advent of BIVA, Mexican equities had become a duopoly and bears are worried that BIVA would eventually steal a huge chunk of the market away from BMV.
Firstly, BIVA was reported to have gained market share relatively quickly to ~20% back in 2020 but that has appeared to stall out in recent years.
Secondly, whilst equities revenue had fallen in FY22 and FY23, they have since recovered into FY24 and will likely hit a new recent high in FY25. Also recall that equities trading is a small portion of BMV’s overall business.
Importantly, BIVA was introduced to entice listing via lower fees and that endeavor has not been successful as companies have not been attracted to the solemn equity markets.
Market share movement as per BIVA:
#4 Dirt cheap valuation
Having covered the trading discrepancy at BMV, let’s talk valuation.
From the table below, the key takeaways are as follows:
Mexico’s stock exchange revenue growth is ranked somewhat middle of the group.
EBITDA margins are on the lower end though still higher than Canada, Malaysia, Israel, and London.
Mexico’s exchange EV/EBITDA is slightly higher than its respective index’s EV/EBITDA though by a mere 0.2x turns, the lowest of the lot.
Mexico’s exchange on the other hand, is the only one one that has lower P/E than its respective index.
All of the exchanges are in net cash except for the LSEG.
Recall from the sections earlier, FCF runs slightly higher than net income and so if we triangulate around ~US$100m of FCF on around US$1bn of market cap, net of cash, we are looking at ~10x FCFE, ex growth.
Note, the Mexican stock exchange constituents is as follows:
Note, the index is decently diversified. A large chunk is driven by materials which will benefit from the commodities upswing. Mexican airports continue to be predictable monopolies that are fairly valued and should continue to do well. Consumer staples like Femsa and Arca have also done well lately in terms of share price performance. Overall, a pretty nifty portfolio of sectors.
Why now?
Typically in Acid fashion, we explore potential reasons for why a mispricing might exist - either due to a lack of coverage, a recent spin-off/listing etc. In this case, it is genuinely perplexing on why the stock trades so cheap - at least cursorily, I can point to anemic revenue growth and deteriorating margins.
One good thing on that front is that it is likely that BMV puts in a new EBITDA high by end FY26 as it exits its trough over the last couple of years.
Moreover, management’s recent 3Q25 call did not provide much confidence regarding future financial performance in the short term at least (note below taken from JPM research):
Also recall that one of the worries was price wars with BIVA though though BMV has indicated that if equity-related fees were reduced, that would be a mere ~US$6m revenue headwind.
The strong Mexican Peso against the USD also poses as a headwind given that BMV earns a chunk of fees in USD.
Nevertheless, at current valuations, much does not need to go right for this equity to work. A revaluation to say 15x FCF (a small premium to its stock market P/E) would provide an easy 50% upside; until then management is committed to paying the ~6% dividend yield and using the rest to sap up shares.
Now back to looking at software names.. yikes