Peso's Tumble Makes Winners Out of Mexican Auto Parts Suppliers

  • Rassini, Nemak are getting a boost from record U.S. car sales
  • Dollar revenue is a lifeline after Mexico's currency drop

Mexican car parts makers are emerging as the winners from the weakest peso since at least 1993, with a boost from dollar-based contracts and record U.S. auto sales.

The peso’s 18 percent decline against the dollar in the past year will help fuel profit at Rassini SAB because most of its sales are in greenbacks while a significant share of costs are denominated in pesos, according to Corporativo GBM SAB. Nemak SAB, which makes aluminum engine blocks and cylinder heads, will gain from factories in the U.S. and sales to automakers such as General Motors Co., Ford Motor Co. and Volkswagen AG.

Rassini and Nemak are benefiting as U.S. consumers bought a record 17.5 million cars and light trucks last year, propelled by a 10 percent drop in gasoline prices and the best two-year job gains since the late 1990s. That’s fueling output at factories throughout North America that are supplied by the two companies, including Mexican plants that pushed the nation’s automobile production to a new all-time high last year.

“We’ve seen the arrival of big names that want to build in Mexico and export to the U.S., benefiting the entire auto parts industry in this country,” Fernando Bolanos, an analyst at Monex Casa de Bolsa, said by telephone from Mexico City.

Toyota Motor Corp. said last year it would invest $1 billion in a new plant in Mexico, following announcements in 2014 by Kia Motors Corp. and Bayerische Motoren Werke AG. The peso fell to as low as 18.0220 per dollar on Monday, the weakest since a 1993 re-denomination, helping Mexican factories reduce their costs in U.S. currency terms.

Nemak, a unit of Alfa SAB, posted a record gain on Jan. 8 after the Mexican Stock Exchange said the parts maker would join the benchmark IPC index of 36 stocks. Since Nemak’s initial public offering in June, it’s climbed 18 percent while the IPC plunged 8.9 percent. Inclusion in the IPC and “satisfying” recent results may help explain the share gains, said Enrique Flores, a spokesman for Alfa.

The manufacturer may have room for additional gains. Its average 12-month price target of 25.61 pesos implies a 9.9 percent increase from the current level, according to analyst estimates compiled by Bloomberg. The shares rose 1.7 percent to 23.69 pesos Tuesday in Mexico City. The company will benefit from the start of operations at two new plants that will bolster profit margins by the end of this year, according to Armelia Reyes, an analyst at Punto Casa de Bolsa.

“I’m considering choosing it as a top pick for 2016,” Reyes, who recommends buying the shares and said she’s in the process of updating her price target, said in an e-mailed response to questions.

Rassini, which makes brakes and suspensions for such vehicles as the Chevrolet Silverado and Corvette Stingray, jumped 25 percent in 2015. The average 12-month price target of 39.04 pesos implies a potential gain of 22 percent from the current level. The shares gained 0.5 percent to 32.14 pesos Tuesday. Rassini is benefiting from a weaker exchange rate, revenue from new contracts and cost controls, said Francisco Freyre, a spokesman for the company.

Total sales are forecast to advance 7.4 percent after last year’s projected increase of 8.1 percent, according to analyst estimates compiled by Bloomberg.

“Rassini has extraordinary benefits when it comes to the exchange-rate effect,’’ Lilian Ochoa, an analyst at GBM, said by telephone. She has a market outperform rating on the stock, with a target price of 40 pesos. “Most of their sales are in dollars yet an important part of their costs are in pesos, which leads to an expansion in margins.”

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