We have retained our Neutral stance on
Fomento Economico Mexicano S.A.-ADR
), alias FEMSA. The company's strong quarterly performance
and initiatives to diversify its portfolio remains its strength.
However, stiff competition from private players and rising
commodity costs compel us to be on the sidelines.
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FEMSA is the largest convenience store operator in Mexico and
commands a countrywide chain of over 10,167 OXXO stores.
Furthermore, FEMSA plans to aggressively expand the network of
OXXO stores to 12,000 by 2014; thereby offering a strong upside
potential to the company's top line. This is quite evident from
the company's third-quarter 2012 results.
Strong revenue growth along with improvement in margins aided
FEMSA to report better-than-expected third-quarter 2012 results.
Earnings for the quarter surged 19.8% to $1.03 per share from the
year-ago quarter level and surpassed the Zacks Consensus Estimate
of $1.01. Total revenue grew 19.5% year over year to $4,597
Going forward, we believe that the company's decision to divest
Quimiproductos will provide it greater financial and strategic
flexibility to pursue opportunities in its core businesses.
Further, the company is initiating prudent steps to diversify its
product portfolio while expanding its convenience store chain,
which augurs well for its future operating performance.
However, we remain slightly cautious on the stock due to its
premium valuation based on forward earnings estimates coupled
with rising commodity prices and intense competition.
The company faces intense competition in the beverage segment
). Additionally, the company encounters competition from local
and regional players in the respective countries. To retain the
existing market share, the company may have to reduce its sales
prices, which could affect its margins.
Other Stocks to Consider
Besides FEMSA, which holds a Zacks Rank #3 (Hold), other stocks
worth considering in the beverage industry are
Coca-Cola Hellenic Bottling Company S.A.
Coca-Cola FEMSA S.A.B de C.V.
), both of which hold a Zacks Rank #2 (Buy).