- By Holmes Osborne, CFA
I had the chance to travel to Medellin, Colombia, recently. The country is phenomenal and might make a good place to invest a little bit of money. The economy and peso should do well with a rebound in commodities. Commodities represent a large part of exports and is why the economy and currency has taken a hit. I think that's going to change. I also met with Grupo Nutresa's (GCHOY) (BOG:NUTRESA) management. I love the company, but unfortunately, it is too difficult for the American investor to buy shares.
The intrinsic value of CIB
Colombia is amazing. Medellin is less than a four-hour plane ride from Miami. Food and lodging are extremely reasonable. Two people can have dinner, with drinks, for about $30. The nicest hotel in Medellin, the Intercontinental, is only $150 a night. The food and accommodations are out of this world. The fruit and vegetables are as fresh as one might expect being so close to the equator. Real estate is still cheap. You can buy a one-bedroom apartment for about $100,000 in Medellin. Property taxes and home owners' fees are low, too. The weather is incredible. Not only are you close to the equator, but many of Colombia's largest cities are located at a high elevation so the heat is bearable. The average annual temperature in Medellin is 72 degrees Fahrenheit. Of course, if you want beach weather, go to Cartegena where it s in the 80s. There is a good article on Seeking Alpha that was written a few weeks ago. I think you will see more positive press on Colombia.
As you know, 30 years ago, the country was run by drug cartels. The violence was incredible. Pablo Escobar even had an Avianca (AVH) flight bombed, targeting a politician who would go onto become president. This violence has ended, but Colombia is still ranked as one of the most dangerous places in the world. The country is still negotiating with the Revolutionary Armed Forces of Colombia (FARC). The FARC has some pretty tough demands, but I think things will get worked out. It is no fun running around the jungle and kidnapping people in 2018. There has got to be an easier way to make a buck. This fellow on Seeking Alpha goes into more depth on FARC.
Colombia looks small on a map, but it is not. It is 440,000 square miles. It is the size of Texas, Pennsylvania, New York and Florida combined. Wow! That's big. The population is 49 million. That's the size of California and Ohio. What's great are the demographics. The country is heavy in younger folks in their 20s and 30s. As these people reach their 40s and 50s, they will be in their peak earning and spending years. Juxtapose that with the U.S., which has an abundance of people coming into retirement. There is still poverty in Colombia. The average person only makes $692 a month. This ranks 54 out of 72 countries.
Of course, there are risks associated with investing in Colombia. It is a developing market. Colombia's neighbor, Venezuela, was not too long ago one of the best places to invest in South America. It now is the worst. Chile and Panama have also seen their fair share of dictators, but things are benign now. The currency can get cut in half. Inflation is rampant in Argentina.
Back in 2014, it only took 1,800 pesos to buy one dollar. With the big selloff in commodities, it now takes 2,857 pesos. At its nadir two years ago, it took 3,400. The peso has been in a range for a little less than two years. I am optimistic on the currency and think that any investment in Colombia will get tailwinds with the peso.
Gross domestic product has gotten crushed over the past several years with the big selloff in commodities. GDP was $380 billion in 2013, $378 billion in 2014, $291 billion in 2015 and $282 billion in 2016. Imagine if GDP dropped like that in the U.S. The central bank of Colombia has put its benchmark interest rate at 4.75%. You would think that would attract some money from all of these low interest countries. When you see what exports are comprised of, you will understand why the economy has gotten beaten up. Oil is 26%, coal briquettes (that's a new one to me) 15%, coffee 8.5%, cut flowers (how romantic) 4.3% and gold 3.9%.
I had the chance to sit down with Catherine Chacon Navarro, Group Nutresa's head of investor relations, in the company's Medellin office. Nutresa controls over 60% of the food market in the country. The stock trades for 27,300 Colombian pesos ($9.83), there are 460.12 million shares and the market cap is 12.561 trillion pesos ($4.4 billion). Earnings per share are 890.5 pesos and the price-earnings ratio is 30.6, but that's before we back out the two major holdings from market cap.
Narvarro pointed out the large shareholding makes it difficult to calculate the value when quickly looking at financial information on Bloomberg or other sites. The stock looks expensive before backing out the two major holdings. The two major holdings are Grupo de Inversiones Suramericana S.A. (GIVPY) and Grupo Argos (BOG:GRUPOARGOS). Nutresa holds 59,387,803 shares of Suramericana, which is worth 2.4 trillion pesos. Nutresa holds 79,804,628 shares of Argos, which is worth 1.67 trillion pesos. When we back out the two major holdings, we get a market cap of almost $3 billion for Nutresa. The two holdings represent 32.5% of the market cap. So if we exclude these for valuation purposes, the price-earnings ratio is 20.7. That's a pretty reasonable valuation for a growth stock.
The balance sheet shows 244 billion pesos in cash and 997 billion pesos in receivables. The liability side shows 783 billion pesos in payables. Counting the shares of stock holdings, that's a strong balance sheet.
Sales growth has been incredible. Sales grew from 3.5 trillion Colombian pesos in 2007 to 8.7 trillion pesos last year. Earnings before interest, taxes, depreciation and amortization (EBITDA) grew from 528 billion pesos to 1 trillion pesos over that time frame. EBITDA margins are usually about 11% to 12%, which is standard for food companies.
The major divisions are: Cold Cuts, Biscuits, Chocolates, Tresmontes Lucchetti -TMLUC, Coffee, Retail Food, Ice Cream and Pasta. In Colombia, Nutressa owns a restraint chain named El Corral, owns 40% of the entity that manages Starbucks and owns the Papa John's franchise. Often times, you will see an El Corral next to a Starbucks. I have eaten at El Corral and it's pretty decent. Colombian fare--lots of meat and rice.
Navarro also impressed upon me the fact that 53.3% of Nutresa's products are sold by small, mom-and-pop shops throughout South America. This is important because many people do not shop at supermarkets. You will see these small stands throughout the continent. She also talked about how child labor is not used in cocoa production and how Nutresa wins sustainability awards every year. Some chocolate companies from Africa use child labor.
Nutressa is highly ranked in many food categories throughout Latin America. It is number one in steakhouses and hamburger restaurants in Colombia and number one in ice cream shops in Costa Rica and the Dominican Republic. Nutressa holds 32.2% of powered dry milk in Mexico and 64.1% in Chile. It also holds 28.5% of the pasta market in Chile.
Profit margins are high, growth is phenomenal and the valuation reasonable. Suramericana has investments in asset management, insurance and holds shares in Nutressa, Grupo Argos and Bancolombia (CIB). Argos receives 53% of its revenues from cement, 19% energy and 22% real estate. It also has crossholdings in Suramericana and Nutressa. I am tempted to buy Argos Cement because of the high profit margins in cement and concrete, but the company actually receives half its revenues from the United States and I am looking just at Colombia. So Nutresa is two-thirds food and one-third cement and other investments in Latin America. But here is the problem: Nutresa is too thinly traded for the American investor. I called Charles Schwab's trading desk and they do not have a presence in Colombia. Then I looked at the pink sheet traded in the U.S. and it has not traded for days. Onto plan B.
Two exchange-traded funds that invest in Colombia are Global X MSCI Colombia ETF (GXG) and iShares MSCI Colombia ETF (ICOL). I like Global X better because it holds $100 million and iShares only holds $22 million. The fees on Global X are 0.61%, not bad for an emerging market fund. It holds over 20% in Bancolombia and the bank's preferred stock, so we will have to take a look. Nutressa and the other holding companies mentioned are also part of the portfolio. There are also some energy companies.
Bancolombia trades on the New York Stock Exchange, so that makes it much better for the U.S. investor. The shares are liquid. It has a market cap of $10.8 billion, the price-earnings ratio is 42 and the dividend yield is almost 3%. Revenues jumped from $9.5 billion in 2014 to $13.7 billion last year. That's growth. The net profit margin is over 10%. As mentioned above, Bancolombia has dozens of crossholdings in Latin American companies. The loan portfolio seems very diversified. Approximately 71% of the portfolio is in Colombia and the rest in other Latin American countries. About a third of the portfolio is consumer loans, 17% construction and 15% commercial. Then there are loans to the ag and mining industries. Standard & Poor's reports the bank purchased other lenders in Guatemala and Panama a few years ago. Morgan Stanley has an earnings target of $4.66 in 2019. It expects earnings growth of 15% for this year and 26% for 2019. The stock now trades at about $45, so it would be cheap if Morgan Stanley's earnings targets come to fruition.
In my opinion, with commodities coming back, the economy and peso should do well. This should drive earnings for these stocks and drive value. Colombia is too close to the U.S. to remain under the radar for much longer. Word is going to spread about what a great country it is. I think a small portion of your portfolio should be invested in an ETF like Global X Colombia.
Disclosure: We own shares.
This article first appeared on GuruFocus.
The intrinsic value of CIB