We have maintained our long-term Neutral recommendation on
Fomento Economico Mexicano S.A.
) or FEMSA with a target price of $96.00 per share. Our long-term
recommendation is supported by a Zacks #3 Rank, implying a
short-term Hold rating on the stock.
Recently, FEMSA reported a robust first-quarter 2012 result with
net income from continuing operations surging 13% to MXN 3,748
million ($288.2 million) from MXN 3,318 million ($274.4 million) in
the year-ago period. The improved results were primarily driven by
an increase in comparable income from operation and inclusion of
20% economic interest in Heineken Group. Moreover, total revenue
grew 25.2% year over year to MXN 53,746 million ($4,133.1 million),
mainly driven by solid performance at Coca-Cola FEMSA and FEMSA
Moreover, the company boasts a strong balance sheet with cash
and cash equivalents of MXN 27,249 million ($2,128.1 million) for
first-quarter 2012 and long-term debt (including current
maturities) of MXN 23,929 million ($1,868.9 million), reflecting a
debt-to-capitalization ratio of 11.7%, which offers financial
flexibility to drive future growth.
Besides, being the largest convenience store operator in Mexico
with 9,699 OXXO stores at the end of first-quarter 2012, the
company is aggressively looking to boost its market share by
expanding its store counts to 12,000 by 2014. We believe the
strategy will certainly drive its top line.
We believe the divestment of the company's brewery operations
has provided management strategic and financial flexibility to
focus on the core bottling and convenience store operations and
implement organic and inorganic expansion plans. Moreover, the
transaction also facilitated FEMSA an opportunity to reward
shareholders through increased distribution of surplus cash in the
form of higher dividends and share buybacks.
The Coca-Cola Company
) indirectly owns 31.6% stake in Coca-Cola FEMSA and approximately
99% of the sales volume is derived from the sales of Coca-Cola
trademark beverages. This gives Coca-Cola Company a significant
hold over the company's operations. There may be certain conflict
of interest between the two companies, which may result in
Coca-Cola FEMSA taking actions contrary to the interests of its
Moreover, increasing costs of raw materials, ingredients, or
packaging materials, such as aluminum, HFCS (sweetener), PET
(plastic), fuel or other cost items are a major concern for FEMSA,
as the company may not be able to pass the increased costs all of a
sudden to its customers for fear of losing them.
Above all, FEMSA faces intense competition in the beverage
). Further, the company also 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.
Headquartered in Mexico, FEMSA is the largest Coca-Cola bottler
in Latin America holding a 20% stake in Heineken, the third largest
global brewer. The company markets a strong portfolio of
globally-recognized brands, including Coca-Cola, Ciel, Fanta,
Sprite, Tecate, Sol, Carta and Blanca Indio. This provides a strong
upside potential for the company. Moreover, the company has 31
bottling plants across 10 countries in Latin America, including
Mexico, Brazil, Argentina, Colombia and Venezuela, and exports its
products to the U.S., Canada, Europe, and Asia.
FOMENTO ECO-ADR (FMX): Free Stock Analysis
COCA COLA CO (KO): Free Stock Analysis Report
PEPSICO INC (PEP): Free Stock Analysis Report
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