Francisco Carrillo of Mexico Value Partners presented his in-depth investment thesis on Gruma (Mexico: GRUMAB) at Best Ideas 2020.

Thesis summary:

Gruma is the leading tortilla and corn flour producer in the world. With solid branding, it has leading market share in the US and Mexico and an important presence in Europe, Central America, Asia, and Oceania. Gruma’s scale, footprint, and brand awareness in the US have created a wide moat that will continue to keep competitors at bay while also allowing for increased profitability in that region. With respect to the Mexican operations, ample growth exists given the relative under-penetration of the market and the fact that Gruma continues to take share from competitors and traditional method of making tortillas, which are still the most popular method (two-thirds of the market, as compared to Gruma’s 25% share). Europe is also a growth opportunity for Gruma.

The high-quality, anti-cyclical business trades at a low valuation of ~7x 2020 EBITDA and ~13x P/E, likely because it is listed in Mexico, which has suffered a de-rating for reasons that have nothing to do with Gruma. The company generates a majority of sales and income in the US, and although Mexico is its second most important market, the international expansion opportunity is perhaps the most interesting part of the thesis.

The balance sheet is strong, with net debt to EBITDA of 1.2x, and there is strong ownership behind the company, which Francisco views as an added positive. Taking advantage of depressed market prices, management instituted an active buyback program in 2018 and has repurchased $180 million of shares during the past two years. Francisco estimates fair value at 260 pesos per share, as compared to a recent market quotation of 200 pesos per share.

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About the instructor:

Francisco Carrillo began his investment career some 20 years ago as an analyst at GBM Grupo Bursátil Mexicano. His tenure at GBM lasted close to 10 years and he held various responsibilities during that time, culminating with his participation in the firm’s investment committee. After GBM, Carrillo co-founded Sabino Capital, a Mexico-based investment partnership. Later, he briefly worked at Bestinver, a renowned Spanish investment advisor. In 2012 he and two other partners founded Mexico Value Partners, a Mexico-based investment partnership where he currently serves as Chief Investment Officer.