Driven by robust segmental performance,
Fomento Economico Mexicano S.A.
(
FMX
) - also known as FEMSA - reported better-than-expected
third-quarter 2012 result. This largest franchise bottler for
Coca-Cola Company
(
KO
) posted net majority income of $1.03 (Ps. 1.32) per share that
beat the Zacks Consensus Estimate by a couple of cents. Moreover,
quarterly earnings was higher 19.8% from the year-ago quarters'
earnings of 86 cents per share.
Quarter in Detail
Total revenue grew 18.1% year over year to Ps. 59.675 billion
($4.523 billion), mainly aided by improvements in revenue at
Coca-Cola FEMSA and FEMSA Comercio. On an organic basis, i.e. on
a comparable basis, total revenue increased 11.7% from the
prior-year period.
FEMSA's gross profit expanded 20.5% year over year to Ps.
25.417 billion ($1.927 billion), and gross margin expanded 90
basis points (bps) to 42.6%. The increase was primarily driven by
gross profit improvements at FEMSA Comercio and Coca-Cola FEMSA
segments.
FEMSA's operating income surged 24.4% to Ps. 7.383 billion
($0.560 billion) from Ps. 5.934 billion ($0.484 billion) in the
year-ago period. On an organic basis operating income increased
18.1% year-over-year. Driven by margin expansions at the
company's both segments, FEMSA's consolidated operating margin
expanded 70 bps to 12.4%.
Segmental Discussion
Total revenue at
Coca-cola FEMSA
soared 20.3% to Ps. 36.193 billion ($2.743 billion) in the
quarter, primarily driven by double-digit growth across all
divisions coupled with the benefits from the acquisition of Grupo
Tampico, Grupo CIMSA and Grupo Fomento Queretano in Mexico.
Excluding these acquisitions, total revenue escalated 9.6%.
The segment's operating income for the quarter surged 26.6% to
Ps. 5.487 billion ($0.416 billion) from the year-ago quarter,
primarily driven by robust performances across all divisions
along with acquisition benefits. Consequently, Coca-Cola FEMSA's
operating margin improved 80 bps to 15.2%. Excluding the recent
acquisitions, operating income was 18.0% higher than the
previous-year quarter.
FEMSA Comercio
registered a revenue growth of 16.0% to Ps. 22.521 million
($1.707 billion), mainly due to the opening of 178 net new stores
in the quarter along with a 7.6% upside in same-store sales. The
company opened 1,019 net new stores in the past twelve
months.
Operating income, for the quarter under review, jumped 24.3%
year over year to Ps. 1.758 billion. Segment's operating margin
expanded 50 bps to 7.8% primarily due to improved gross margin,
partially offset by increased expenses due to store openings and
developing specialized distribution channels.
Financial Position
At the end of the third quarter of fiscal 2012, the company
had cash and cash equivalents of Ps. 30.031 billion ($2.335
billion). Long-term debt at the end of the quarter was Ps. 25.242
billion ($1.962 billion), reflecting a capitalization ratio of
11.3%. During the third quarter, FEMSA made a capital expenditure
of Ps. 3.965 billion ($0.301 billion) towards incremental
investments at Coca-Cola FEMSA and FEMSA Comercio.
Recent Development
Going with its strategy of focusing only on core business, in
September this year, FEMSA entered into an agreement with
Ecolab Inc
. (
ECL
) to sell its wholly-owned subsidiary Quimiproductos. The
transaction is expected to conclude in the fourth quarter. Apart
from providing water treatment, Quimiproductos is specialized in
manufacturing and providing cleaning as well as sanitizing
products and services related to food and beverage industrial
processes.
Our Recommendation
We believe that FEMSA's decision to divest its wholly-owned
subsidiary Quimiproductos operations to Ecolab will facilitate it
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.
FEMSA, which competes with
PepsiCo Inc.
(
PEP
), retains a Zacks #3 Rank, translating into a short-term Hold
rating for the next 1-3 months. Moreover, we maintain our
long-term 'Neutral' recommendation on the stock.
ECOLAB INC (ECL): Free Stock Analysis Report
FOMENTO ECO-ADR (FMX): Free Stock Analysis
Report
COCA COLA CO (KO): Free Stock Analysis Report
PEPSICO INC (PEP): Free Stock Analysis Report
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