We are disappointed with FEMSA's lackluster bottom-line results for
second-quarter 2014. The company's earnings were mainly battered by
a fall in Heineken's second-quarter 2014 net income, increased
financing expenses resulting from the bonds issued by Coca-Cola
FEMSA and unfavorable foreign exchange rates. 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. Despite all these negative factors, we
have maintained our Neutral recommendation on the stock as we are
optimistic about the company's initiatives directed toward top-line
growth. We note that FEMSA has been diversifying its retail chain
format operations and acquiring businesses across Latin America.
Moreover, the company has been aggressively expanding its store
base which we believe will help it in boosting its top-line.
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 in
Latin America, across countries 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 (61% of sales in 1Q14) 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 (39% of sales in 1Q14) 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.
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