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Rob Citrone's Mexican Bets
Posted by: fedezaldua (IP Logged)
Date: December 2, 2013 10:46AM

Rob Citrone, who belongs to the exclusive Tiger Club, is one of the best hedge fund managers in the street. His fund, Discovery Capital Management, is currently managing over $11 billion, and it has one of the best track records out there – its Discovery Global Opportunity Ltd. fund has a three-year compounded annual return of almost 12%. Citrone invests across all sectors and regions but his fund is famous for its emerging market related bets. Here is a look at the fund's biggest Mexican positions: Cemex (CX) and Televisa (TV).

A U.S. Recovery Related Play

Even though Cemex is based in Mexico, its future growth and a huge share of its revenues come from the U.S: The company generates 30% of its EBITDA in the U.S. The company's third quarter is proof of an improving picture for the still over-leveraged cement producer, as its net debt to EBITDA stands at 5.3 times. Cemex’s third quarter EBITDA was up by 2% year-over-year to $747 million. Revenues also came up by 3% and its EBITDA margin stayed flat at 18.6%. Yes, the company still suffered a $155 million net loss, but such loss can be explained through non-cash items such as the impairment of fixed assets.

Meanwhile, Cemex's business continues to outperform. Revenues and EBITDA continue to show signs of recovery. Cement volumes increased by 7% year over year and ready mix and aggregates posted a 2% year-over-year increase thanks to strong demand on the residential sector as well as favorable results in the industrial and commercial sectors. The company's guidance for its U.S. business also remains favorable at 5% year-over-year growth for cement and 9% and 5% for ready mix and aggregates, respectively.

All in all, with its U.S. business ameliorating fast and Latin America still outperforming above all its Colombian operations — I think Citrone is making the right call by staying long Cemex. The cement producer sells for 8.1 times 2014 EV/EBITDA, but this figure should go down fast as debt is repaid and EBITDA keeps recovering.

A Multiple Case Investment Idea

Citrone might have bought Televisa's shares for many reasons. Let's cite a few:
  1. Televisa is poised to benefit from a recovery in ad spending in Mexico.

  2. Mexico is going through structural growth in pay TV.

  3. If, as it was recently commented in the press, the Federal Communications Commission loosens the 25% foreign ownership cap on TV broadcasters in the U.S., then Televisa could exercise its full rights to Univision's equity. In 2010 Televisa made a $1.3 billion investment to acquire up to 40% of Univision, a company which is growing its EBITDA at a 15% yoy pace. The investment was made through the following structure: 5% upfront purchase of Univision's equity, debentures convertible into 30% equity, and an option to purchase an additional 5% equity. Hence, if the cap is loosened, Televisa could own up to 40% of the biggest Spanish TV broadcaster in the U.S.
In addition, operationally, the company is doing perfectly well. Televisa has lowered its net debt to EBITDA from 1.5 times in 2011 to 1.2 times in 2013. It has kept its high 39% EBITDA margin untouched, and it's adding customers through Sky (Televisa controls Sky Mexico). The company does not look cheap when selling at 8.7 times 2014 EV/EBITDA, but high-quality growth is there to explain Televisa's high price.

Bottom Line

I am not surprised that both investments made by Citrone's fund make perfect sense. It's always a good practice to look at what great investors are buying and try to figure out the reasons behind every investment.

Stocks Discussed: CX, TV,
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