Value Creation Strategy and Shareholder Activism Defense
A sharp value creation strategy not only ensures that a great business is a great stock—but it also helps deter activist attacks.
Mexico’s listed companies have shown that it is possible to create value across sectors regardless of broader macroeconomic trends. From 2017 to 2022, some companies were able to navigate headwinds and deliver outstanding returns to shareholders.
Our first value creators study of the Mexican market reveals an average five-year TSR of 5.2%, higher than that of other emerging-market indexes such as the S&P Colombia BMI, S&P Emerging Markets BMI, and S&P Chile BMI. But Mexico still lags the TSR of Mexican Federal Treasury Certificates (CETES) as well as other developed and emerging countries. (See “Methodology” for more details on our analysis.)
The top performers delivered an average five-year TSR of 18.4%, almost four times the market average. The biggest driver of TSR for these top performers was revenue growth, accounting for 13.4 percentage points. These companies also leveraged their cash flow contribution (CFC) to further increase value creation. Furthermore, the change in valuation multiple had little impact on their performance, in contrast with bottom performers, which were not able to retain their valuation multiple.
Our analysis indicates that companies can create value regardless of their industry sector and scale. At least one company from most sectors had returns exceeding the market average. The financial institutions and insurers sector had an outstanding average five-year TSR of 11.3% followed by transportation and infrastructure with 8.5%. Additionally, companies of all sizes were present in the top quartile, suggesting that players of any scale have the potential to unlock value.
We identified common strategies in the top performers that helped them create value and navigate a challenging market. Top performers boosted both the top and bottom line while returning cash to shareholders—and without necessarily elevating their debt levels. They did so through an effective M&A agenda, higher participation in foreign markets, increased dividend distributions, and effective two-way communication with investors.
Mexico’s macroeconomic landscape has been one of opportunities—and obstacles—for listed companies. The country’s GDP increased at a CAGR of 1.3% over the past ten years, which is in line with the Latin American average of 1.2%. In the capital markets, the market cap of listed companies grew at a 2.6% CAGR to reach approximately US$460 billion, with the number of listed companies increasing from 136 in 2012 to 139 in 2022.
Over the past year, nearshoring has become attractive for foreign companies, offering Mexico an opportunity to boost manufacturing and exports. Conservative fiscal and monetary policies as well as a projected surge in domestic middle-class consumption (driven by demographic expansion) suggest an optimistic economic outlook. Yet Mexican capital markets still need to fully capture these benefits.
Recent trends are challenging the development of Mexican markets. The COVID-19 pandemic made it difficult for companies to grow top-line and maintain profitability. High interest rates and inflation remain potential obstacles to private-consumption growth. Moreover, the upcoming elections in June 2024 have added uncertainty to Mexico’s situation.
In the context of this landscape, we identified the value creators and analyzed how their industry sectors, scale and size, and trading volume factor into their performance. We also pinpointed common strategies shared by the value creators. In addition, we evaluated whether Mexico’s equities market is suitable for value creation and how companies can navigate challenges and deliver returns to shareholders.
Total shareholder return (TSR) measures a combination of share price appreciation and dividend yield for a company’s stock over a given period of time. It serves as a comprehensive metric for gauging a company’s shareholder value creation performance.
TSR can be broken down into its four contributing components:
BCG’s TSR model uses revenue increases and changes in margins to measure profit growth. It then uses the change in valuation multiple to evaluate the impact of investor expectations on TSR. Together, these two factors determine the change in a company’s market cap and the capital gain or loss to investors. Finally, the model tracks the distribution of free cash flow to investors and debt holders in the form of dividends. TSR disaggregation and key levers are summarized in Exhibit 1.
To understand Mexico’s performance, we focused our analysis on Mexican listed companies with a market cap above US$1 billion at the end of 2022, which totaled 52 companies in seven sectors (see the appendix):
We analyzed these companies over a five-year period ending in December 2022 to capture their end-of-year results and full-year strategies.
Mexico had a five-year TSR of 5.2%, while CETES (364 days) had a five-year TSR
We used BCG’s TSR disaggregation model to understand the drivers of market performance for Mexico.
Mexico’s five-year TSR was driven mainly by revenue growth (8.6 pp), followed by CFC (2.9 pp). Conversely, the change in margin (–1.1 pp) and valuation multiple
Some companies in the Mexican market were able to deliver higher returns and create value for shareholders despite the overall market conditions. The top-quartile value creators had an 18.4% five-year TSR, almost four times greater than the market average of 5.2%. (See Exhibit 4.)
There was a large dispersion between the top and bottom performers. As shown in Exhibit 5, the threshold for being in the top quartile was 11.2%, compared with the median of 6.4% and the third-quartile threshold of –1.4%.
To understand what distinguishes the top-quartile value creators from the rest of the pack, we compared them with the overall market and bottom quartile. TSR for top-quartile performers surpassed the market by 13.2 pp and the bottom quartile by 27.0 pp. (See Exhibit 6.)
The main difference between the drivers of the top and bottom quartiles was the change in revenues, with an 8.8-pp gap between the two groups. The other drivers (margin, valuation multiple, and CFC) all had a difference of about 6 pp.
Top-quartile performers demonstrated that not only were they able to increase their revenue, but they were able to do so profitably. Moreover, they managed to grow while maintaining debt levels, with a higher CFC than the market and bottom-quartile performers. In contrast, the overall market showed a decrease in margins, which was accentuated in the bottom-quartile performers. It is worth noting that the valuation multiple did not have a considerable impact on the top-quartile performers, showing that their performance is priced in by market analysts.
To better understand top performers, we analyzed them at the sector and scale level. The analysis shows that dispersion of TSR within sectors was 6.6 pp larger than dispersion between sector averages, suggesting that companies from any sector have the potential to unlock value regardless of market conditions. (The TSR dispersion within sectors was 26.4 pp on average, and the dispersion of sector TSR averages was 19.8 pp.)
FI&I emerged as the leading sector, achieving a 11.3% five-year TSR, followed by T&I with 8.5%. TMT was the lowest-performing sector with a five-year TSR of –8.5%. (See Exhibit 7.) IG showed the highest TSR dispersion within the industry: its top performer achieved a 30.6% TSR while the worst performer had a –13.9% TSR. This further shows that companies can create or destroy value within the same sector.
Although most sectors were negatively affected by the change in valuation multiple, some were able to mitigate the effect through CFCs. (See Exhibit 8.) Moreover, these sectors managed to do so while still boosting the top line. TMT and retail were the sectors most affected by the change in multiple, but sectors like FI&I and T&I achieved outstanding TSRs by increasing the top line and returning cash to shareholders.
The negative effect of the valuation multiple can be explained by the presence of mature companies with limited expectations of growth, a handful of success stories in the market, and a drastic change in business model impacting top-line growth and profitability margins. This last observation was particularly evident in TMT, which showed the lowest valuation multiple of 5.3.
IG, FI&I, retail, CPG, and T&I all had at least one top-quartile performer. IG and FI&I were the most represented sectors, with three companies each, and consistently appeared in the top quartile over the past five years. (See Exhibit 9.) Additionally, IG, FI&I, TMT, conglomerates, and CPG had companies among the bottom performers.
In terms of market cap, companies of all sizes were present in the top quartile. Companies were divided into three categories: small cap (less than US$3.5 billion), mid cap (US$3.5 billion to US$8 billion), and large cap (more than US$8 billion). Mid-cap companies were overrepresented with 39%, while large-cap companies were underrepresented with 8% in the top quartile. Mid-cap companies had an average five-year TSR of 8.4%, while small-cap and large-cap companies delivered five-year TSRs of 3.7% and 5.4%, respectively. On the same note, companies were able to create value regardless of trading volume and regardless of whether they were listed as American depositary receipts (ADRs) in the US.
Mexico’s top value creators have demonstrated that it is possible to grow despite the challenges the market faces. Our analysis of these companies’ strategic agendas shows that there are certain common strategies that drive these players to create value for shareholders.
We analyzed their strategy through BCG’s TSR optimization framework, which confirmed that being a “great company” with a competitive advantage and growing profitability is not enough to provide value to shareholders. Companies must also be “great stocks,” meaning they have an optimal valuation multiple, strong and sustainable TSR, and loyal long-term investor base. By aligning their business, financial, and investor strategies, companies can offer investors a compelling investment thesis. (See Exhibit 10.)
An effective great-company business strategy involves identifying sources of competitive advantage and fostering growth through programs that drive performance under both normal and challenging situations. We can see this growth driver in the top-quartile performance from 2019 to 2022. Despite the COVID-19 pandemic, most top performers increased revenues and margins. During the 2019 to 2022 period, 92% of the top-quartile performers boosted revenues and 61% lifted margins.
Most top performers demonstrated that expanding their geographic portfolio was also advantageous. The revenues of the companies already present in international markets increased during the past five years. (See Exhibit 11.) For example, Grupo Simec’s 40% CAGR in Brazilian revenues from 2017 to 2022 exemplifies the company’s skill in seizing market opportunities and driving growth. Another example is Grupo Bimbo, which expanded its reach through acquisitions in more than 30 countries, solidifying its presence in key markets like Spain and Brazil.
When we looked at inorganic growth in the top quartile, we observed that the companies with M&A activity had accretive results. For instance, Chedraui expanded its US presence by acquiring Fiesta Mart in 2018. Then, in 2021, the company added warehouse grocery stores in California, Nevada, and Arizona through its purchase of Smart & Final and gained discount stores in Mexico’s Huastec region through its acquisition of Arteli. Chedraui grew both top-line and bottom-line during this period, showcasing its ability to complete these deals while delivering accretive results and maintaining healthy debt levels.
To have an effective financial strategy, companies must be disciplined on dividend distributions and share buybacks. We observed consistency in terms of dividend contributions across the board, including top-quartile companies, which managed to distribute dividends while growing the top line. (See Exhibit 12.) Moreover, the top-quartile companies demonstrated that they could grow in revenues—at an average CAGR of 13%—without necessarily increasing their debt levels and having a high dividend yield, which allowed them to deliver even more value to shareholders.
For example, Lamosa has had a steady generation of positive free cash flow (FCF) and an adequate liquidity position. Through a disciplined debt repayment program, the company has maintained consistently low leverage levels. And Lamosa’s strong operating cash flow generation has allowed it to cover working-capital requirements, capex, and dividend payments, resulting in positive FCF generation.
To retain their valuation multiple and attract investors, companies must look through an investor lens. They need to identify their investor base and mold their message to fit them, implementing a transparent line of communication through which they notify investors about milestone accomplishments and regularly report metrics.
This can be seen in the contrasting effect of the multiple on the top and bottom quartiles. The valuation multiple had a less negative impact (1.3 pp) on top-quartile performers, compared with bottom-quartile performers (7.6 pp). By implementing a strong investor communication strategy, companies can retain their valuation multiple and deliver value to investors.
A clear example of effective investor communication is Walmart de México y Centroamérica (Walmex). The company has focused on prioritizing transparency, providing regular updates, and maintaining a strong financial performance. Feedback from the market is valued, creating a two-way communication channel. Walmex has effectively used annual analyst meetings, regular conferences, roadshows, and the Walmex Day event to maintain consistent communication and transparency. Furthermore, the company offers stock options to its executives, incentivizing them to use an investor lens when making decisions. Walmex’s focus on results and long-term implications remains pivotal, helping the company to achieve its multiple objective (an EV/EBITDA multiple that has grown from 14 in 2017 to 16 in 2022).
CEOs, CFOs, and boards of directors can leverage our six-part guide to create a path to a winning TSR and become both a great company and a great stock. (See Exhibit 13 and the appendix.)
As our analysis of the Mexican market shows, investors in the country have an opportunity to generate value by targeting top-performing Mexican companies. These leading performers have shown that it is possible to deliver value to shareholders in the Mexican market with returns that were almost four times higher than the overall market. Other companies can also aspire to become a great company and great stock by aligning their business, financial, and investor strategies—and thus attracting investors and ensuring long-term growth.
There’s an opportunity for the Mexican market to grow and overcome its macroeconomic challenges. In the meantime, companies can create value for shareholders while contributing to the development of capital markets.
The authors thank Alfredo Urquiza and Jeronimo Fueyo for their contributions to this report.
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