Coca-Cola Femsa Downgraded to Strong Sell - Analyst Blog

Zacks Investment Research downgraded Coca-Cola FEMSA S.A.B de C.V. KOF to a Zacks Rank #5 (Strong Sell) on March 15 after the company reported soft fourth quarter 2013 results.

Why the Downgrade?

On Feb 26, Coca-Cola FEMSA S.A.B de C.V. also known as Femsa posted lower-than-expected bottom-line results in the fourth quarter of 2013. The largest franchise bottler for The Coca-Cola Company KO reported earnings of $1.12 per share, which lagged the Zacks Consensus Estimate of $1.57 per share by 28.7% due to a volatile consumer environment, especially in Brazil and Mexico and the adverse impact of currency fluctuations across its operations.

Quarterly net consolidated income of the company fell nearly 44.2% to Ps. 6,754 million ($518.4 million) from the comparable year-ago quarter income of Ps.12,106 million ($935.0 million). The decrease was primarily due to higher cost of sales, increased operating expenses, decline in Heineken's third-quarter 2013 net income in which FEMSA has a 20% participation interest, and increased financing expenses as a result of the recently issued bonds by Coca-Cola FEMSA and FEMSA Comercio.

Though total revenue increased in the quarter, Femsa's gross margin contracted 110 basis points (bps) to 43.1% primarily due to higher input costs and freight costs in the South American division and input cost pressure in Mexico operations as well. Operating margin also contracted 150 bps to 13.8%, primarily due to South American currency devaluation and increased operating expenses. On an organic basis, operating income decreased 5.5% year over year.

This beverage company witnessed sharp downward estimate revisions after announcing fourth quarter results. The Zacks Consensus Estimate declined 2.4% for 2014 and 0.7% for 2015 over the past 30 days.

Other Stocks to Consider

Not all stocks are performing as poorly as Femsa. Better-ranked stocks in the consumer staples sector include Diamond Foods Inc. DMND and Inventure Foods, Inc. SNAK, both holding a Zacks Rank #2 (Buy).