Coca-Cola Femsa Earnings: Resilient Volume Despite Price Hikes, but Currencies Remain a Challenge

We plan to maintain our $94 fair value estimate on wide-moat Coca-Cola Femsa KOF after absorbing the bottler’s better-than-expected third-quarter results, with revenue up 10% and adjusted net profits up 23%, outpacing our estimates of 8% and 15%, respectively. We plan to revise our 2023 estimates upward to incorporate the strong results, but our 10-year forecast for mid-single-digit percentage sales growth and operating margins averaging 14% remain in place. The stock looks attractive, trading at a 22% discount to our intrinsic valuation, and we suggest long-term investors consider buying this name given its strategic partnership with Coca Cola and cost advantages.

The bottler delivered an impressive 12% volume growth for the quarter, 8% for the first nine months, which we attribute to constant innovation, astute in-market execution, and steady progress in expanding distribution in the fragmented South America market. Coke Femsa also benefited from its digital initiatives spearheaded by omnichannel B2B platform Juntos, which now serves a million monthly active clients, mostly small, traditional trade retailers outside major metro areas that were difficult to serve previously. Sales from digital channels have grown to 17% of total sales so far in 2023 (up from low-single digits 5 years ago), and we see further upside in the coming years, which should bode well for sales growth and margins.

Reported sales numbers implied a negative 2% pricing, which is entirely due to negative currency translation against the Mexican peso, notably in the South America business unit. Holding currencies constant, revenue would have grown 19% on a 7% price hike, including a 19% increase in South America, 40% of total volume. Even with the currency headwinds, Coke Femsa managed to eke out a 70-basis-point expansion on the operating margin line to 13.5%, thanks to easing inflation in packaging costs, and better leverage of selling expenses helped by a higher mix of digital sales.