Cracking Open Coca-Cola FEMSA Could Prove Refreshing For Investors

Despite a multi-quarter run of better-than-expected results, Coca-Cola FEMSA (NYSE:KOF) still isn’t getting its due in the market. The company has had to deal with input cost inflation, economic turbulence in multiple markets, and more distant challenges like labeling and taxation changes and a sometimes-contentious relationship with Coca-Cola (KO), but the company has executed strongly in recent quarters and if anything is better-leveraged to easing input costs than vulnerable to higher costs.

Mid-single-digit revenue and FCF growth can support a double-digit return from here, and the shares likewise look undervalued on an EV/EBITDA basis given the company’s growth, margins, returns, brand value, and strategic opportunities.

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Cracking Open Coca-Cola FEMSA Could Prove Refreshing For Investors

FEMSA's First Quarter Was Messy, But Basically Positive

With the combination of a late Easter and the impact of new accounting standards (IFRS16), it was likely that FEMSA’s (FMX) first quarter was going to be messy relative to expectations, and so it was. Reported revenue was weaker than expected, but I’d argue core underlying trends remain strong. Although FEMSA management still has much to prove regarding the strategic expansion into pharmacies and fuel stations, the OXXO business still offers significant growth potential and Coca-Cola FEMSA (KOF) seems to finally be on better footing.

The shares do not seem radically undervalued, but I do think they still offer some value and a way to add non-U.S. exposure through a very well-run Latin American consumer/retail company.

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FEMSA's First Quarter Was Messy, But Basically Positive

Driven By OXXO, The Core FEMSA Story Remains Attractive

FEMSA (FMX) isn’t the simplest company, nor does it offer the cleanest, most straightforward financial reports, but at its core this remains a well-run play on Latin American consumers. Underpinned by the OXXO convenience store business, I believe FEMSA has a long runway of attractive growth opportunities and the capital to further enhance its prospects. Currency moves and the health of the Mexican economy are key variables, but with a double-digit implied return on offer, I believe this remains a good candidate as a core holding for investors who want some emerging market exposure.

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Driven By OXXO, The Core FEMSA Story Remains Attractive

FEMSA Offers A Strong Core Amid Market Wobbles

As a leading consumer/retail business in Mexico, there’s no getting around the fact that currency matters to the valuation and day-to-day performance of FEMSA (FMX). The trick, if I can call it that, is balancing the usually shorter-term impacts of currency volatility with the longer-term core operating fundamentals and quality of the business. So while the recent currency pressures (not to mention greater caution regarding emerging markets) is certainly relevant, I wouldn’t lose sight of the long-term quality of this business.

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FEMSA Offers A Strong Core Amid Market Wobbles

A Tale Of 2 FEMSAs

All in all, Mexico’s FEMSA (FMX) continues to perform relatively well, though there has certainly been a sharper distinction lately between the strong performance of the retail operations and the lackluster-to-disappointing results of Coca-Cola FEMSA (KOF). With improved profitability in the drugstore business, a good long-term growth plan for the core OXXO operations, and opportunities for Coca-Cola FEMSA to do better, I continue to believe this is a good core holding for investors who want exposure to Mexican/Latin American consumers.

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A Tale Of 2 FEMSAs

FEMSA Offers Long-Term Value, But 2018 Won't Be A Banner Year

FEMSA’s (FMX) performance over both the past few months and the past year has been decidedly mediocre, as the company continues to work through some restructuring efforts at Coca-Cola FEMSA (KOF) while building up its Health (drugstores) and Fuel (gas station) operations. Add in foreign currency volatility and undeployed capital from a partial sale of its Heineken (OTCQX:HEINY) stake, and there are a lot of moving parts working against the bottom line.

I continue to believe that FEMSA is a well-run conglomerate that offers good exposure to Latin American, and particularly Mexican, consumer spending growth, but challenges in Mexico, Brazil, and the Philippines are likely to keep a lid on performance in 2018. A fair value in the neighborhood of $105 still makes this a name worth considering, but I expect the shares to mark time at least until the elections in Mexico are decided.

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FEMSA Offers Long-Term Value, But 2018 Won't Be A Banner Year

FEMSA Continues To Offer Attractive Value

Shares of FEMSA (FMX), a large Mexican consumer conglomerate, are always going to twitch with concerns about Mexico's economy (including the exchange rate with the U.S.), but management has demonstrated over the years that it knows how to build value for shareholders. Recent endeavors like drugstores and gas stations will take time to mature, but the underlying growth story for the company remains intact.

I continue to believe that $105 to $115 is a good fair value range for the ADRs and that opportunities to buy below $100 should be considered by investors who want some exposure to emerging market (especially Mexican) consumer spending growth. Although 2018 could be a little more challenging due to political issues, I believe high single-digit growth potential continues to support a healthy outlook for double-digit long-term returns.

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FEMSA Continues To Offer Attractive Value

A Little Near-Term Softness Hasn't Changed The FEMSA Story

Although FEMSA (NYSE:FMX) haven’t done all that well since my last write-up, I think the modest pullback could be another opportunity for long-term investors to acquire shares in one of the best-run Mexican companies, not to mention one with consider room left to grow. FEMSA shares have been hurt by a combination of currency moves, natural disaster-related traffic disruptions, and some concerns about capital allocation, but I believe these are all short-term issues that don’t impinge upon the underlying value.

I continue to believe that FEMSA will leverage long-term high single-digit revenue growth into double-digit FCF growth, supporting a fair value in the $105 to $115 range. FEMSA has several NPV-positive potential capital projects to choose from, including accelerating the growth of OXXO, acquiring more drug stores, or expanding further outside Mexico, and I believe pullbacks below $100 are good buying opportunities.

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A Little Near-Term Softness Hasn't Changed The FEMSA Story

FEMSA Plugging Away With Its Empire-Building

FEMSA (FMX) has gotten tossed around a bit since my last update, as this large Mexican consumer products conglomerate has weathered a rattled Mexican stock market (and currency) as well as more company-specific concerns about volumes and margins. Still, the shares are up a bit over that period and still offer a little upside for patient long-term shareholders. As I said in that prior piece, the valuation isn't at a can't-miss level (or at least for investors with shorter investment horizons), but the long-term potential of this company makes it worth considering on the pullbacks.

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FEMSA Plugging Away With Its Empire-Building

FEMSA Comes Through Again

FEMSA's (NYSE:FMX) third quarter wasn't flawless, but it was a good quarter that showed ongoing progress in most of the initiatives that matter most to management and to the creation of shareholder value. While the "will they/won't they?" with the Heineken stake is likely to drag on, there are a lot of irons in the fire with Coca-Coca FEMSA (NYSE:KOF) and plenty of growth opportunities for the retail operation.

I haven't made too many meaningful changes to my model, and most of the change in my fair value calculation come from changes in the value of the Heineken stake (which I value at current prices) and exchange rates. With a fair value of $103 and a runway to several years of above-average growth, I believe FEMSA is worth considering as a buy candidate, particularly on the frequent pullbacks that seem to come with these shares.

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FEMSA Comes Through Again

Coca-Cola FEMSA Offers Interesting Value Today And Upside Down The Line

I've made no secret over the years that Fomento Economico Mexicano, S.A.B. De C.V. (FEMSA) (NYSE:FMX) is one of my favorite emerging market companies, as I believe the company has a solid cash-generating business in Coca-Cola FEMSA (NYSE:KOF), exciting growth opportunities on the retail side with its OXXO stores and growing pharmacy business, and significant options with the 20% stake it holds in Heineken (OTCQX:HEINY).

I'm looking at Coca-Cola FEMSA in a little more depth today, though, because I think the valuation here is pretty interesting, there are good growth opportunities on the horizon, and investors may be more comfortable with an emerging markets business anchored by demand for Coca-Cola (NYSE:KO) products rather than a more speculative retailing-based growth story. I believe Coca-Cola FEMSA is priced to generate low-to-mid double-digit total annual returns at today's price, with potential earnings upside tied to economic recoveries in major markets, improved performance in Brazil, and expansion into other bottling markets.

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Coca-Cola FEMSA Offers Interesting Value Today And Upside Down The Line

FEMSA Building Its Empire A Quarter At A Time

The transformation that FEMSA (NYSE:FMX) has undergone over the last decade or so is pretty remarkable, as the company has built itself into a major force in Mexican retailing as well as a significant player in Coca-Cola's (NYSE:KO) global bottling operations. Management isn't spending much time resting on its laurels, as it takes the cash flow and access to capital generated by its growth to date to reinvest in expanding the business into new end markets like pharmacies and gas stations and new markets like Chile.

FEMSA isn't close to exhausting its potential avenues for growth, but questions about margins and returns on capital are relevant as the company looks to allocate more and more capital to grow the business. I'm still looking for high single-digit to low double-digit long-term growth, and I expect FEMSA to extend its operations into the U.S. and additional Latin American countries in the coming years. The shares aren't dramatically undervalued today and there is some risk of a second half slowdown in Mexico, but it remains a solid option for emerging market growth.

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FEMSA Building Its Empire A Quarter At A Time

Seeking Alpha: Amid Many Challenges, FEMSA Keeps Executing

Nothing's particularly easy these days for companies that have to deal with South America, and likewise there is more than a little uncertainty about the near-term outlook for Mexico. Those are certainly challenges for FEMSA (NYSE:FMX), but the company's solid execution and organic growth continue to move the company forward, and it is clear that management is following a vision for a much larger retailing enterprise down the line.

I can understand why some investors won't want to bother with the currency and economic risks that go with a company operating in Mexico (not to mention Brazil, Chile, Colombia, and Argentina). I believe the rewards are worthwhile, though, and I think FEMSA's fair value is around $105 on the basis of high single-digit long-term growth fueled by the cash-generating Coca-Cola FEMSA (NYSE:KOF) operations and the growing Comercio Retail operations.

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Amid Many Challenges, FEMSA Keeps Executing

Seeking Alpha: FEMSA Continues To Play The Long Game

As a family-controlled operation, FEMSA (NYSE:FMX) management has the option to run the business with an exceptionally long-term focus and make trade-offs between short-term growing pains and long-term opportunities. To that end, recent ventures into fast food, pharmacies, and gas retail aren't going to do much to boost near-term valuation, but they support a long-term vision of FEMSA as a comprehensive play on the Mexican consumer across multiple facets of their lives.

The near-term performance of FEMSA's ADRs is certainly tied to the performance of the Mexican peso, and that's not a good thing at the moment. Nevertheless, I believe these shares now trade at a double-digit discount to fair value and offer a good option for investors looking to gain exposure to the Mexican consumer.

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FEMSA Continues To Play The Long Game

Seeking Alpha: FEMSA Leveraging OXXO And Has Ample Dry Powder

The Mexican economy isn't helping much, but FEMSA (NYSE:FMX) continues to post respectable results on the back of its strong OXXO convenience store chain. Taxes in Mexico and extreme currency problems in Venezuela are hurting the company's stake in Coca-Cola FEMSA (NYSE:KOF), but FEMSA continues to explore new avenues of growth in Mexican retail like pharmacies, restaurants, and now gas stations and has the option of using its Heineken (HINKY) stake to fund larger initiatives.

Operationally, FEMSA still looks like an attractive stock to hold, but currency moves have negatively impacted my valuation. At around $90 or below, I would certainly give strong consideration to adding this name to a portfolio, as I believe it not only one of the best-run Latin American companies, but also one with extensive growth options for the coming years.

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FEMSA Leveraging OXXO And Has Ample Dry Powder

Seeking Alpha: Economic Worries Weigh On FEMSA

Mexican consumer conglomerate FEMSA (NYSE:FMX) hasn't had a great 2014, as analysts and investors have continued to worry about the impact of new taxes and a sluggish economic recovery on Mexican consumers. Insofar as the things under FEMSA management's control go, however, 2014 has been a decent year and the company continues to offer a solid investment case as a good play on Mexico's economy and a long-term profitable redeployment of capital.

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Economic Worries Weigh On FEMSA

Seeking Alpha: FEMSA Seeing A Slower Rebound

One of the key stories for those who invest in Mexico, and major Mexican companies like FEMSA (NYSE:FMX), Cemex (NYSE:CX), Walmex (OTCQX:WMMVY), and Grupo Bimbo, is the pace of economic recovery in Mexico. While some measurements of the economy have been getting more positive, the overall pace of recovery seems to be a little slower than hoped as higher taxes have pressured disposable income and other pro-growth efforts have yet to really kick in and contribute.

That's not a great backdrop for FEMSA and this large consumer-focused company had a so-so second quarter. Management's comments seemed to point toward a more gradual recovery than a sharp upward inflection, but underlying results aren't exactly terrible. I can't call FEMSA an especially cheap stock today, but management has a long-term play to make this company an even larger consumer-focused business and there is still above-average long-term growth potential.

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FEMSA Seeing A Slower Rebound

Investopedia: Coca-Cola FEMSA Adds More Volume In Brazil

Coca-Cola FEMSA (NYSE:KOF), the second-largest Coca-Cola (NYSE:KO) bottler in the world and owned by both Coca-Cola and FEMSA (NYSE: FMX), continues to show a willingness to invest for future growth and margin leverage. KOF has spent roughly $6 billion over the last two years, including nearly $700 million to expanding into the Philippines. Now KOF has added some significant assets in Brazil with the $1.9 billion acquisition of Spaipa, the second-largest private Coca-Cola bottler in Brazil.

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