The shares of FEMSA (FMX) haven’t performed all that well since my last update, declining about 10%, lagging the S&P 500, the Bolsa, and Wal-Mart de Mexico (OTCQX:WMMVY) (“Walmex”). I believe at least some of this underperformance is due to ongoing concerns about the company’s M&A program in U.S. janitorial and sanitation distribution, with the company spending over $1B to acquire several businesses.
The Street has taken a “show me” stance with FEMSA, and that’s understandable to a point, given this foray into a new market and concerns about the pace of the in-store traffic recovery at OXXO. Still, I believe the Street is taking an overly pessimistic and short-sighted approach, particularly as the company’s new Spin digital wallet can drive meaningful high-margin revenue in the years to come, not to mention ongoing growth opportunities in the core retail operations.
Not much has changed in my basic modeling for FEMSA; I’m still expecting mid-to-high single-digit long-term revenue and FCF growth, with improving margins and free cash flow as investments in distribution and financial services pay off over time.
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