On Dec 20, we upgraded our recommendation on
Fomento Economico Mexicano, S.A.B. de C.V.
) - also known as FEMSA to Neutral from Underperform with a
target price of $100.00. The company carries a Zacks Rank #3
Why the Upgrade?
FEMSA was upgraded after it posted better-than-expected
earnings for third-quarter fiscal 2013, following a negative
earnings surprise streak for two consecutive quarters. The
company delivered earnings of $1.10 per share that was 0.9% above
the Zacks Consensus Estimate, while in the second and first
quarter it missed the estimate by 36.1% and 37.9%, respectively.
Strong revenue growth of 7.2% aided FEMSA to report
better-than-expected third-quarter 2012 results.
The co-owner of
Coca-Cola FEMSA S.A.B de C.V.
), which is the world's largest franchise bottler of
The Coca-Cola Company
) products, is taking prudent steps to diversify its product
portfolio while expanding its small-box retail segment, which
augurs well for future operating performance.
We observe that FEMSA has been diversifying its retail chain
format operations and acquiring businesses across Latin America.
In May 2013, the company forayed into the drugstore retail chain
business by fully acquiring Mexico-based Farmacias FM Moderna and
buying 75% stake in Farmacias YZA. We believe that FEMSA's
venture into the drugstore business strategically fits its store
chain business, which will be accretive to its top and bottom
lines in the long term.
Going forward, we consider that the company's divestment of
Quimiproductos has provided it greater financial and strategic
flexibility to pursue opportunities in its core businesses. FEMSA
has a healthy balance sheet with cash and cash equivalents of Ps.
50,322 million ($3,825 million) at the end of third-quarter
fiscal 2013. We believe that FEMSA is aptly utilizing its
available funds to focus on the core bottling and convenience
store operations as well as to implement organic and inorganic
However, we prefer to be on the sidelines due to certain
negative factors. As part of its larger fiscal reform, the
Mexican government plans to tax carbonated soft drinks
(CSDs) in order to tackle growing prevalence of obesity in the
country. We believe that continued regulatory pressure can lead
to significant attrition in the Mexican soda market, which can
have a material impact on FEMSA's business.
Moreover, intense competition and rising commodity costs are
factors, which restrain us from being more optimistic about the
Other Stocks to Consider
A better-performing stock in the soft-beverages category that
looks promising is
The WhiteWave Foods Co.
), which carries a Zacks Rank #2 (Buy).
FOMENTO ECO-ADR (FMX): Free Stock Analysis
COCA COLA CO (KO): Free Stock Analysis Report
COCA-COLA FEMSA (KOF): Free Stock Analysis
WHITEWAVE FOODS (WWAV): Free Stock Analysis
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