On Sep 26, 2013, we downgraded the Latin American beverage
Fomento Economico Mexicano S.A.B de C.V.
), to Underperform based on lower-than-expected bottom-line
results in the past two quarters.
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Why the Downgrade?
Estimates for FEMSA, the largest franchise bottler for
The Coca-Cola Company
), have been declining since it reported second-quarter results
on Jul 25. FEMSA's second-quarter fiscal 2013 earnings of $0.78
per share fell short of the Zacks Consensus Estimate of $1.22.
Following the release of second-quarter results, the Zacks
Consensus Estimate for fiscal 2013 has gone down 3.6% to $4.02
per share. The Zacks Consensus Estimate for fiscal 2014 also
declined 3.8% to $4.76. With the Zacks Consensus Estimates for
both fiscal 2013 and 2014 going down, the company now has a Zacks
#4 Rank (Sell).
Cause for Concern
Apart from the earnings decline, we remain cautious on the
stock's future performance as FEMSA witnessed a meager rise of
0.9% in comparable-store sales of its OXXO stores, which
exhibited the lowest growth since 2009. Moreover, the company has
witnessed a fall in customer traffic during the quarter, for the
first time since 2003.
Moreover, stiff competition from private players and rising
commodity costs compel us to take a negative stance on the stock.
In addition, the company's premium valuation limits the upside
potential in the stock.
Given that The Coca-Cola Company has a 31.6% stake in the
company, Coca-Cola FEMSA derives 90% of its sales from the
former's trademark beverages. This gives The Coca-Cola
Company a significant advantage over the company's
operations. Thus, there may be a certain conflict of
interest between the two companies, which may result in Coca-Cola
FEMSA taking actions, which can be detrimental to the interests
of its remaining shareholders.
Other Stocks to Consider
Other stocks worth considering in the beverage industry are
Coca-Cola Enterprises Inc.
Coffee Holding Company Inc.
). Coca-Cola Enterprises has a Zacks Rank #2 (Buy), while Coffee
Holding Company carries a Zacks Rank #3 (Hold).