The Best Investment to Play Mexico's Growth

There's a catchy new acronym gaining traction in emerging markets, and it points to the next best investment opportunity in developing economic growth.

Four emerging markets - Mexico, Indonesia, Nigeria, and Turkey - make up the MINT economies. Like BRIC - Brazil, Russia, India, and China - before them, these four are expected to outpace the developed world over the coming years. According to Bloomberg, they've already doubled their economies since 2000.

Of those four, one is a clear leader: Mexico.

Mexico's economy has grown 50% since 2004. The growth stems from two factors: China, and automobiles.

Over the last several years, manufacturing wages in China have been rising relative to those in the United States and Mexico. This has led to more "nearshoring" - companies moving production from Asia to the Americas. Late last year, the seesaw tipped, and China's average manufacturing wages surpassed Mexico's, according to The Wall Street Journal.

One of the biggest beneficiaries of this trend has been the Mexican automotive industry. Between 2003 and 2013, Mexican production of automobiles rose from 1.6 million units to a projected 3 million.

And one of the world's largest economies wants what Mexico is selling.

Around 80% of Mexico's manufacturing exports go to the United States. Imported goods from Mexico to the United States in 2012 totaled $277.7 billion, up 5.6% from 2011, according to the United States Trade Representative.

Mexico's share of U.S. imports of cars and automotive products rose 9% to 20%, making Mexico the United States' second-biggest provider after Canada, according to the IMF. The United States imported $53 billion worth of those products in 2012.

But new goods don't just arrive by magic at their destination. Someone has to carry them. And that's why transportation has become the best investment in Mexican growth.

Riding the Rails to Profit

For an investor looking to get a piece of Mexico's growth, one company stands out as the best investment: Kansas City Southern (NYSE: KSU).

KCS is the smallest of the remaining major public railroads in the United States. It has just over 6,300 miles of track, compared to the other Class I railroads that typically have more than 20,000 miles. A map of its track looks more like a straight line than the arterial spread of the Norfolk Southern or Union Pacific.

But the location of that straight line makes it vital.

The Kansas City Southern runs north-south from Kansas City, connecting central Illinois to the oil fields of Texas and the ports of Veracruz and Lazaro Cardenas in Mexico. It is the only Class I railroad in the United States that has a majority-owned Mexican subsidiary, Kansas City Southern de Mexico. It also controls both the American and Mexican sides of the Laredo International Railway Bridge, which is the busiest port of entry on the Texas-Mexico border.

Its map makes KCS uniquely able to capture value not only from Mexico's boom, but also growth in the American southwest.

According to an October 2013 presentation, the company has already positioned itself to capitalize on Mexico's growing automotive industry. Kansas City Southern already serves nine automotive plants in Mexico and is in location to serve four new plants opening by 2016.

The railroad also has extensive track through Dallas and into the west Texas oil fields. This is one of the fastest-growing population centers in the United States.

In other words, the Kansas City Southern connects the fastest-growing industrial regions in Mexico with the fastest-growing population center in the United States. And what do people in Texas's wide open spaces require? Automobiles.

KCS stock is trading around $125 per share, a 50% increase since the beginning of the year. Revenues have risen steadily since 2009, from $1.4 billion to $2.2 billion. Net income, as well, has risen from $67.1 million in 2009 to $377 million in 2012.

The stock is currently trading at a premium to its competitors. Forward price-to-earnings ratio is 24, compared to around 14 for larger roads like Norfolk Southern and Union Pacific. It is also showing year over year quarterly earnings growth of more than 30%, compared to 10% for Union Pacific and 19% for Norfolk Southern.

But this is an investment in future growth.

"Kansas City [Southern] is a high quality company," T. Rowe Price analyst Andrew Davis told Barron's. "You are paying for a company that can grow earnings in excess of 15% annually for a long time, given manufacturing moving into Texas and Mexico."

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