Femsa Earnings: Strong Convenience and Bottling Results; Share Buybacks Not Value Accretive
We plan to maintain our $110 fair value estimate on narrow-moat Femsa after absorbing its second-quarter results. Sales rose 12%, led by the Oxxo chain and the bottling business, and operating profits grew by 16%. We remain constructive on the long-term outlook for convenience retail and bottling but expect headwinds to persist in the health format; sales were flat in the quarter and operating income slumped 15%. Despite efforts to rationalize the store base and tighten cost control, we expect a protracted turnaround in this format given intense competition in Mexico and Ecuador. We applaud the firm’s capital allocation initiatives via special dividends totaling $600 million, but don’t think the accelerated share buybacks are an optimal use of capital as we view shares as fully valued. Our 10-year forecasts for annual sales growth and average operating margins both in the high-single-digits remain in place.