Walmart De Mexico: not growing pains

Mexico has many charms. Economic growth is not one of them. The IMF recently trimmed its 2015 output forecast for the country to three per cent - an acceleration from last year, but miles short of the boom times. Oil is a key export and contributes almost a third to the government's budget. But oil prices are down at the same time as Mexico's production is falling in the Gulf. The result is that government spending is expected to contract for the next year or two. And despite the current administration's effort to reform the economy, real wages remain stagnant.

So why are shares in Walmart de Mexico so expensive? After they rallied sharply along with the rest of the Mexican market in the early months of the year, they trade at a sporty 24 times forward earnings estimates. This for a company that grew sales four per cent last year, and three per cent the year before. Profits are only growing a little faster. Sales growth accelerated in the first quarter of this year - but gross margins fell. Is the company itself excited about its growth prospects? Well, capital investment fell last year; its store count grew at the same middling rate as sales.

One appeal of the company is its ability to generate cash and an increasing propensity to return it. The company will pay a special dividend that, on top of the regular one, will push its yield towards above 5 per cent this year. The company carries no debt. The special payouts may keep coming.

This is not enough to explain the share price, however. What could explain it are the prices investors interested in owning large retailers - anywhere on the globe - are asked to play. Walmart de Mexico's parent company is itself growing sales only a little faster than inflation; for this you pay 16 times earnings, several notches above the company's long-term average. Charmless combinations of growth and earnings are found at food retailers across the globe. Mexico, it appears, is not an exception.

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