Updated Research Report on FEMSA - Analyst Blog

We issued an updated research report on Fomento Economico Mexicano S.A.B de C.V. FMX, also known as FEMSA following the company's dismal fourth-quarter 2013 bottom-line results.

This largest franchise bottler for The Coca-Cola Company KO reported net majority income of US$1.05 per share that was significantly lower than the year-ago quarter figure of US$2.08 and lagged the Zacks Consensus Estimate of US$2.01.

However, total revenue rose 11.1% year over year to Ps. 70,490 million, mainly aided by improvement in revenues at Coca-Cola FEMSA S.A.B. de C.V. KOF and FEMSA Comercio divisions. On an organic basis, total revenue climbed 3.2% from the prior-year comparable quarter.

Despite strong top-line performance, FEMSA reported lackluster bottom-line results mainly due to higher cost of sales and operating expenses, fall in Heineken's fourth-quarter 2013 net income in which FEMSA has a 20% participation interest, and increased financing expenses resulting from the recently issued bonds by Coca-Cola FEMSA and FEMSA Comercio.

FEMSA has witnessed sharp downward estimate revisions after reporting disappointing fourth-quarter 2013 results. The Zacks Consensus Estimate for fiscal 2014 decreased 5.4% to $4.19 per share over the last 60 days. For fiscal 2015 too, the Zacks Consensus Estimate declined 2.8% to $4.78 per share.

Further, we believe that continued regulatory pressure can lead to significant attrition in the Mexican soda market, which can have a material impact on FEMSA's business. The Mexican government has imposed a tax of 1 peso (approximately $0.08) per liter on carbonated soft drinks to tackle the rising health problems related to obesity in the country.

However, we observe that FEMSA has been diversifying its retail chain format operations and acquiring businesses across Latin America. Recently, FEMSA bought 80% stake in the fast-food restaurant chain Dona Tota. The company is taking prudent steps to diversify its product portfolio while expanding its small-box retail segment, which augurs well for its future operating performance.

Further, in May 2013, the company forayed into the drugstore retail chain business by fully acquiring Mexico-based Farmacias FM Moderna and buying 75% stake in Farmacias YZA. We believe that FEMSA's venture into the drugstore business is a strategic fit for its store chain business, which will be accretive to its top and bottom lines in the long term.

Currently, FEMSA carries a Zacks Rank #3 (Hold).

Key Picks from the Sector

A better-ranked stock worth considering in the sector is Coca-Cola Enterprises Inc. CCE carrying a Zacks Rank #2 (Buy).