Company Reports

We don’t plan any material changes to our $105 fair value estimate on narrow-moat Femsa after absorbing its solid first-quarter results. Sales were up 11% led by the OXXO chain and the bottling business, and operating profits rose 14%. We remain confident in the long-term outlook in the convenience format and the bottling segment. But given the setbacks in drugstores, we think it’s prudent for the firm to be more selective given complex macro and regulation backdrops and varying consumer preferences across Latin America. Our 10-year forecasts for sales CAGR and average operating margins both in the high single digits remain in place, and we view shares as slightly overvalued.

We are maintaining our $105 fair value estimate for narrow-moat Femsa after absorbing mixed 2023 results. Sales growth of 18% (adjusted for divestitures) met our estimate, but the 6% decline in operating income missed our projection for 1% growth. We attribute the profit shortfall to margin compression across retail formats due to high labor costs and a slower ramp-up in newer stores, both of which are fixable, in our view. We remain confident in the long-term outlook for the convenience and fuel formats as well as in bottling, but we see hurdles in regulations and consumer preferences for the struggling health format (5% of 2023 operating profit) and expect the firm to moderate its ambitions in the area. That said, our 10-year forecast for both sales CAGR and average operating margins in the high-single digits are still attainable. Shares look expensive, even after a 16% correction in the past week.

We award a narrow economic moat rating to Femsa based on the intangible assets and cost advantages at major subsidiaries Coca-Cola Femsa and the Oxxo small-format retail chain, which jointly made up 70% of 2022 revenue and around 75% of pretax profits.

We plan to raise our $97 fair value estimate on narrow-moat Femsa by a mid-single-digit percentage to incorporate better-than-expected third-quarter results, a stronger Mexican peso against the U.S. dollar and time value. Revenues grew 12% (excluding the Valora acquisition), and operating profits rose 10%, outpacing our estimates of 10% and 9%, respectively. Results were thanks to solid same-store sales at Oxxo and resilient beverage volume at subsidiary Coke Femsa. We plan to nudge up our 2023 profit projection by a low-single-digit percentage, but our 10-year forecasts for annual sales growth and average operating margins both in the high single digits remain in place. Shares trade in a range we'd consider fairly valued.

We expect to raise our $97 fair value estimate on narrow-moat Femsa by a mid-single digit percentage to incorporate better-than-expected second-quarter results and Mexican peso appreciation against the U.S. dollar. Organic revenue grew 9.5% (excluding the Valora acquisition) and operating profits were up 4.5%, edging our estimates (8.7% and 4.1%, respectively). Thus, we are nudging up our pre-print 2023 estimate by a low-single-digit percentage on the bottom line. Our 10-year forecasts for annual sales growth and average operating margins both in the high-single digits remain in place. Shares trade in a range we’d consider fairly valued.

We award a narrow economic moat rating to Femsa based on the intangible assets and cost advantages at major subsidiaries Coca-Cola Femsa and the Oxxo small-format retail chain, which jointly made up 70% of 2022 revenue and around 75% of pretax profits.

We expect to maintain our $91 fair value estimate for narrow-moat Femsa after absorbing its first-quarter results, with organic revenue up 12% (ahead of our 11% forecast) and operating profits up 5% (below our 6% assumption). We attribute the profit shortfall primarily to a lower-than-expected operating margin of 1% from the newly acquired Valora retail in Europe, while profitability in bottling and other retail units was stable. Our 10-year forecast for 8.5% annual sales growth and operating margins averaging 9.3% remains in place. Shares are fairly valued, and we suggest investors wait for a better entry point as operational risks in a sprawling retail footprint across Latin America call for a wider margin of safety.

We applaud the clarity and decisiveness with which narrow-moat Femsa unveiled its plan to focus on long-term strategic priorities in retail and beverage bottling and divest all noncore assets over the next 24 to 36 months, including its 15% stake in narrow-moat Heineken (valued at $8.5 billion) and the Envoy distribution business. Within a day of the announcement, Femsa representatives had resigned from the Heineken board, and the firm had initiated on an equity and exchangeable bond sale that will reduce its stake in the brewer to 8%. Following all divestitures, the simplified operating structure will include only wide-moat Coke Femsa and Femsa retail making up 32% and 68% of operating profits, respectively.

Coca-Cola Femsa and parent Femsa are well positioned to ride positive consumption trends across Latin America, thanks to the region's increasing disposable income, favorable demographic trends (rising population with a median age of 31), and underpenetration of branded consumer goods and services. We award a wide moat rating to Coca-Cola Femsa based on strong brand affinity arising from the bottler's symbiotic long-term partnership with wide-moat Coca-Cola and cost advantages from its manufacturing and distribution scale. We assign a narrow moat rating to Femsa (which has a 47% stake in Coke Femsa) as the complexity of managing sprawling retail businesses (over 50% of revenue) across disparate Latin American markets reduces our confidence in the firm’s ability to earn excess returns for more than 20 years.

We award a narrow economic moat rating to Femsa based on the intangible assets and cost advantages at major subsidiaries Coca-Cola Femsa and the Oxxo small-format retail chain, which jointly made up 70% of 2021 revenue and 86% of pretax profits.

We are dropping coverage of Femsa. We provide broad coverage of more than 1,500 companies globally and periodically adjust our coverage according to investor interest and staffing.

From a Coca-Cola bottler to a convenience store network, pharmaceutical operations to fuel stations, logistics services to restaurant depots, brewers, and specialized distributors, the number of businesses operating under the auspices of Femsa is impressive. Still, despite the breadth of operations, we see common threads that unite them, leading to symbiotic strategic relationships that strengthen the commercial prowess of each entity. Moreover, with largely separate management teams focused on their individual units and significant financial resources, we believe each segment is positioned to navigate its competitive landscape.

Narrow-moat Femsa’s results for 2022’s first quarter put it on track to exceed our full-year expectations as economies in Mexico and its other territories normalize after the pandemic. Given solid momentum in its key segments, we expect to lift our fair value estimate of $93 per share by a low-single-digit percentage. We view its shares as undervalued.

From a Coca-Cola bottler to a convenience store network, pharmaceutical operations to fuel stations, logistics services to restaurant depots, brewers, and specialized distributors, the number of businesses operating under the auspices of Femsa is sprawling (and this isn’t even an exhaustive list). Still, despite the breadth of operations, we see common threads that unite them, leading to symbiotic strategic relationships that strengthen the commercial prowess of each entity. Moreover, with largely separate management teams, we believe the right focus is in place at the highest levels and, in conjunction with massive financial resources, should allow each business to navigate the competitive landscape.

Diminishing impact from the pandemic in Latin America benefited Femsa in the fourth quarter of 2021, allowing it to achieve full-year revenue above our forecast. On the basis of its results and momentum, we expect to lift our fair value estimate of $92 per ADR by a low-single-digit percentage; we view the shares as undervalued.

From a Coca-Cola bottler to a convenience store network, pharmaceutical operations to fuel stations, logistics services to restaurant depots, brewers, and specialized distributors, the number of businesses operating under the auspices of Femsa is sprawling (and this isn’t even an exhaustive list). Still, despite the breadth of operations, we see common threads that unite them, leading to symbiotic strategic relationships that strengthen the commercial prowess of each entity. Moreover, with largely separate management teams, we believe the right focus is in place at the highest levels and, in conjunction with massive financial resources, should allow each business to navigate the competitive landscape.

Despite lingering effects of the pandemic, narrow-moat Femsa’s results for 2021’s third quarter (revenue growth of 12.6% and a 9.1% operating margin) keep it on track to reach our full-year estimates of 8.2% revenue growth and an operating margin of 8.3%. We do not expect to make any material change to our fair value estimate of $92 per ADR and view Femsa as slightly undervalued. However, we see greater potential upside in its subsidiary, narrow-moat Coca-Cola Femsa, which trades at a roughly 22% discount to our fair value estimate of $69 (see our Oct. 28 note).

Femsa disclosed that CEO Eduardo Padilla is set to retire on Jan. 1 and be replaced by Daniel Rodriguez Cofre. Padilla, who has served as CEO since 2018, has been with Femsa since 1997 and was instrumental in the growth of Oxxo, so his experience will be missed. However, Rodriguez has been with Femsa since 2015 and is the current CEO of Femsa Comercio, so the transition should be smooth. We do not expect any major changes to Femsa’s strategy, which includes managing Coca-Cola Femsa’s portfolio to drive sales and expanding Oxxo’s footprint while improving profitability of both units. Moreover, the CEO change does not affect our Standard capital allocation rating. While we have a generally favorable view of Femsa’s recent acquisitions and investments to diversify its portfolio and expand Oxxo, we would prefer more consistent dividend growth and share buybacks.

From a Coca-Cola bottler to a convenience store network, pharmaceutical operations to fuel stations, logistics services to restaurant depots, brewers, and specialized distributors, the number of businesses operating under the auspices of Femsa is sprawling (and this isn’t even an exhaustive list). Still, despite the breadth of operations, we see common threads that unite them, leading to symbiotic strategic relationships that strengthen the commercial prowess of each entity. Moreover, with largely separate management teams, we believe the right focus is in place at the highest levels and, in conjunction with massive financial resources, should allow each business to navigate the competitive landscape.

From a Coca-Cola bottler to a convenience store network, pharmaceutical operations to fuel stations, logistics services to restaurant depots, brewers, and specialized distributors, the number of businesses operating under the auspices of Femsa is sprawling (and this isn’t even an exhaustive list). Still, despite the breadth of operations, we see common threads that unite them, leading to symbiotic strategic relationships that strengthen the commercial prowess of each entity. Moreover, with largely separate management teams, we believe the right focus is in place at the highest levels and, in conjunction with massive financial resources, should allow each business to navigate the competitive landscape.