We have maintained our long-term 'Neutral' recommendation on
Fomento Economico Mexicano S.A.
) or FEMSA with a target price of $100.00 per share. Our
recommendation is based on the company's improved quarterly results
for the second quarter of fiscal 2012.
FEMSA reported robust second-quarter 2012 results with net
income from continuing operations surging 28.8% to MXN 5.437
billion ($0.425 billion) from MXN 4.221 billion ($0.330 billion) in
the year-ago period. The improved results were primarily driven by
an increase in income from operation and inclusion of 20% economic
interest in Heineken Group. Moreover, total revenue grew 22.9% year
over year to MXN 59.586 billion ($4.660 billion), mainly driven by
solid performance at Coca-Cola FEMSA and FEMSA Comercio.
Being the largest convenience store operator in Mexico with
9,989 OXXO stores at the end of the second quarter of 2012, the
company is aggressively looking to boost its market share by
expanding its store count to 12,000 by 2014. We believe that this
strategy will certainly drive its top line in the future.
Moreover, we believe that the company's divestitures of brewery
operations to Heineken have provided it greater financial and
strategic flexibility to pursue opportunities in its core
businesses. Furthermore, FEMSA has a strong balance sheet with
lower debt-to-capitalization ratio, offering greater financial
flexibility to drive future growth.
However, increasing cost of raw materials, ingredients, or
packaging materials such as aluminum, HFCS (sweetener), PET
(plastic), fuel or other cost items are the major concerns for
FEMSA, since the company may not be able to pass the increased
costs immediately to its customers for the fear of losing them.
In addition, FEMSA faces intense competition in the beverage
). Further, 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.
Currently, the company retains a Zacks #4 Rank, implying a
short-term Sell rating.
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
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