Company Reports

Wide-moat bottler Arca Continental reported flat first-quarter sales and a 1% net profit expansion as economic challenges in Argentina and widespread social unrest in Ecuador offset solid performance in the US and Mexico. We think the bottler’s execution has been strong in areas within its control, including innovation, digital investments, and multicategory expansion. However, we plan to trim our 2024 sales and net profit estimates by a low-single-digit percentage to reflect more severe headwinds in South America than we anticipated. That said, we see no need to change our 10-year projections for a 5% sales compound annual growth rate and 15% average operating margins or our MXN 180 fair value estimate, and we view shares as undervalued.

We award a wide moat to Arca Continental. We think brand intangibles from its status as a top five bottler to wide-moat Coca-Cola, coupled with cost advantages given its large manufacturing and distribution scale, should support the firm’s competitive standing and excess investment returns for more than 20 years.

Wide-moat bottler Arca Continental reported a 5% contraction in fourth-quarter sales, missing our 6% growth projection, but this is primarily due to sizable unfavorable currency moves in the U.S. and South America that make up 60% of total sales. Underlying trends remain healthy, with a 2.4% volume expansion and mid-single-digit pricing excluding currency impacts reaffirming the firm’s solid position in beverages and its agility in in-market execution. Net profits still grew 15% (though lagging our 18% estimate), which we attribute to easing input cost pressure, a favorable price mix, more efficient digital selling, and a lower tax rate. We plan to trim our 2023 sales and profit estimates to reflect the fourth-quarter shortfalls but continue to see our 10-year projections for 5% sales CAGR and 15% average operating margins as attainable. As such, we don’t plan any material changes to our MXN 173 fair value estimate.

Arca Continental is well-positioned to ride consumption tailwinds in Latin America, thanks to rising disposable income, favorable demographic trends, and the underpenetration of commercial beverages. We award the firm a wide moat rating given the strong brand affinity arising from its symbiotic, long-term alliance with wide-moat Coca-Cola, and cost advantages from its manufacturing and distribution scale.

We award a wide moat to Arca Continental. We think brand intangibles from its status as a top five bottler to wide-moat Coca-Cola, coupled with cost advantages given its large manufacturing and distribution scale, should support the firm’s competitive position and excess investment returns for more than 20 years.