Can FEMSA (FMX) Sustain Recent Momentum in Q4 & in 2018?

Fomento Economico Mexicano, S.A.B. de C.V. FMX, alias FEMSA, has regained its position in investors’ books after a solid third-quarter 2017, which marked a turnaround in the company’s dismal surprise trend. Further, the company remains poised for growth driven by solid portfolio and robust strategic measures including increasing store count, diversifying business portfolio and focusing on core business activities. These factors make FEMSA a favorable pick at the moment with a promising future.

Further, the stock is supported by a long-term earnings growth rate of 15% and a VGM Score of A, which justifies growth prospects. These factors have helped the company retain a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Shares of FEMSA jumped 8.4% in the past month, outperforming the broader industry’s 3.2% upside. That said, let’s find out the reasons behind the upsurge in the stock price.

Return to Positive Surprise Trend

As mentioned earlier, FEMSA returned to earnings beat trend in third-quarter 2017, with both earnings sales topping estimates. Notably, it reported a positive earnings surprise after four consecutive bottom-line misses, while revenues topped estimates after two consecutive misses. Sales gains in the quarter were fueled by solid performance across all segments, taking into account the consolidation of the Philippines and Vonpar’s integration at Coca-Cola FEMSA S.A.B. de C.V. KOF.

Fomento Economico Mexicano S.A.B. de C.V. Price, Consensus and EPS Surprise

Fomento Economico Mexicano S.A.B. de C.V. Price, Consensus and EPS Surprise | Fomento Economico Mexicano S.A.B. de C.V. Quote

Meanwhile, earnings gained from the sale of 5.24% interest in Heineken Group, the parent of Heineken NV HEINY and financial gains at Coca-Cola FEMSA.

Positive Estimate Revisions

Analysts seem to have become increasingly positive on the stock, following the impressive third quarter. Consequently, the Zacks Consensus Estimate for the fourth quarter and full-year 2017 has been trending up lately. The estimate for fourth-quarter has moved up 2.8% to $1.09 per share in the last seven days. Similarly, the full-year estimate witnessed a 22.5% growth to $7.24 per share.

FEMSA Formidable Portfolio – A Key Strength

FEMSA has a formidable portfolio with exposure in various industries including beverage, beer and retail. This provides it an edge over competitors. The company mainly gets its exposure to the beverage industry through Coca-Cola FEMSA, which operates as the world’s largest franchise bottler for The Coca-Cola Company KO. In the beer industry, it enjoys a notable position as it owns 14.76% in Heineken, a leading brewer with operations in 70 countries.

Moreover, its share in the retail space relates to the operation of various small-format store chains including OXXO, through its FEMSA Comercio subsidiary. Apart from these, FEMSA provides logistics, point-of-sale refrigeration solutions and plastics solutions to its business units and third-party clients through FEMSA Strategic Businesses subsidiary.

Other Growth Drivers

FEMSA has been taking prudent steps to diversify product portfolio while expanding in the small-box retail segment, which bodes well for future operating performance. In an attempt to strengthen retail portfolio, the company acquired Big John, a grocery store, in Santiago, Chile. Given its renowned status and solid growth prospects, Big John is likely to enhance FEMSA Comercio’s convenience store operations in Chile.

The company has been focused on achieving growth via acquisitions for a while now. Earlier, the company gained presence in South America through the Grupo Socofar buyout, which not only widened its exposure in the drugstore business but also brought beauty operations under its ambit. Additionally, the company has been diversifying retail chain format operations by acquiring businesses across Latin America. FEMSA Comercio has considerably extended its footprint in the small-format retail chains in Mexico, Chile and Colombia.

Additionally, FEMSA has been focused on expanding its drugstore operations as it sees significant potential in that space. The company has been aggressively seeking to capitalize on growing drugstore business. As of Sep 30, 2017, the company had a total of 2,178 point of sales across all regions, of which 24 net new stores were added in the third quarter.

Further, it is on track with efforts to build infrastructure and integrate four legacy drugstore operations into a single operating platform. These include its previously acquired Mexican drugstore business — Farmacias YZA, Farmacias FM Moderna and Farmacias Farmacón — as well as South America’s leading drugstore operator, Grupo Socofar. We believe FEMSA’s venture into the drugstore business strategically fits its chain-store business, and will be accretive to both its top and bottom-lines in the long term.

Possible Deterrents

While FEMSA displays overall strength in operations, its margins remained under pressure. Gross margin was hurt by growth of lower-margin businesses at FEMSA Comercio, while operating margin contracted due to soft Coca-Cola FEMSA margins. Further, margins at FEMSA Comercio’s Retail division are likely to remain soft going forward. The company also provided a cautious sales outlook for fourth-quarter 2017 and 2018 backed by high inflation rates, upcoming presidential elections in Mexico and ongoing discussions to modernize trade.

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Fomento Economico Mexicano S.A.B. de C.V. (FMX) : Free Stock Analysis Report
 
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