Description

Consorcio Ara trades at 34% of book value and 7 times trailing earnings and just might be the most undervalued stock in North America. I'm writing this up again because I believe the company is about to get more aggressive in returning capital to shareholders and growth is about to accelerate. No one has really cared too much since the last time I wrote this up because growth has been middling and the company very conservative. Many have thought the company to be a value trap and I think things are finally reaching an inflection point, especially considering how few homes are being built in Mexico.

Mexican housing production continues to fall leading to crisis levels of housing and record home price appreciation.

This chart from the Mexican housing registry says it all:

Mexico has been producing fewer and fewer homes every year and is on track to produce a remarkable 50% fewer homes than was produced in 2013.

The average age in Mexico is 29. The combination of the nearshoring of manufacturing and being the US’ largest trading partner has led the Mexican economy to grow at nearly 4% this year.

Mexico should be building more homes and the current production is not sustainable. This has led quite predictably to record home price appreciation.

Consorcio Ara is starting to benefit. Despite building 5.3% fewer homes this year, Q2 sales increased 4.9% thanks to average prices rising nearly 11%.

Mexico needs homebuilders to make more money and for their margins to expand to build more housing. Unlike in the US, there aren’t many pure land developers who commit capital and get land developed for homebuilders to build on. That means that homebuilders have to be in a capital position and be truly motivated to develop lots of land.

And after the disastrous ten years from 2011-2021, few are in such a position. It is for this reason, that I expect the coming Mexican housing bull market to last for much longer than investors could imagine. We need Mexican homebuilders to be raking in the cash, so they develop and build much more housing than is currently being supplied to the market.

In 2021, I wrote up on VIC: https://www.valueinvestorsclub.com/idea/Consorcio_Ara/1398892453

Since my original report, investors have earned a 34% total return including the 14% or so in dividends.

But now growth is looking to accelerate at the company. Consorcio Ara is now guiding to 20% revenue growth in the second half of the year as multiple projects come online. At the exact same time there is a shortage of homes.

On August 9th, investors will receive a 5% dividend. I’m expecting Ara’s dividend to jump by at least 50% next year based on conversations with management and that the company is starting to receive interest about some of the excess beachfront property it owns. Nothing is firm yet, but Mexican brokerage GBM estimates these properties may represent 25% of the company’s market cap. Ara management has told me that in the event of a sale, the company would consider special dividends and buybacks.

One key point is that whenever there is a big block of stock traded like there was on July 27th, you can pretty definitively guess that it is Ara that is buying the stock. They are actively on the hunt for big blocks of stock.

It’s been pretty boring for Ara shareholders, but now that growth is accelerating, capital returns to shareholders should accelerate as well. And at our backs is the undeniable fact that Mexico needs more homes, a tailwind that is only growing in force. And I believe this will lead to years of excess returns for Ara shareholders and this is why I think it is worth a second VIC report.

Catalyst

Acceleration of growth

Big jump in dividends

Sale of excess real estate, which leads to special dividend or tender offer.