Based on lower-than-expected bottom-line results for fourth-quarter
2013, we have downgraded our long-term recommendation on FEMSA to
Underperform. The weak year-over-year performance was primarily due
to higher cost of sales and operating expenses, fall in Heineken's
fourth-quarter 2013 net income and increased financing expenses
resulting from the recently issued bonds by Coca-Cola FEMSA and
FEMSA Comercio. Further, 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. In
addition, the company's premium valuation limits the upside
potential in the stock. Our bearish view on the stock is further
justified by the decline in the Zacks Consensus Estimate, following
the company's dismal results.
Fomento Economico Mexicano SAB de CV, also known as FEMSA, is
one of the largest beverage companies operating in Latin America.
Headquartered in Mexico, the company has 35 bottling plants across
countries in Latin America, including Mexico, Brazil, Argentina,
Colombia and Venezuela, and exports its products to the U.S.,
Canada, Europe, and Asia. The company also owns the largest
convenience chain, OXXO, in Mexico. During fiscal 2010, FEMSA
completed the divestiture of its brewery operations to Heineken
N.V., the third largest global brewer. As per the deal, FEMSA
received a 20% stake in Heineken. FEMSA currently operates through
its subsidiaries, Coca-Cola FEMSA and FEMSA Comercio.
Coca-Cola FEMSA (62% of sales in FY13) is the flagship segment
engaged in the production and distribution of carbonated beverages.
The division is the largest Coca-Cola bottler in Latin America and
the second largest Coca-Cola bottler globally, in terms of sales
FEMSA Comercio (38% of sales in FY13) operates a chain of
convenience stores in Mexico under the brand name, OXXO. At the end
of quarter, the division operated 11,210 OXXO stores.
Fomento Economico Mexicano S.A.-ADR (FMX): Read the
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