FEMSA (FMX) Looks Troubled: What's Wrong with the Stock?

Fomento Económico Mexicano, S.A.B de C.V FMX or FEMSA has been facing difficult times for a while now as is evident from this Zacks Rank #4 (Sell) stock's movement in the trading zone. Evidently, this leading Latin American beverage company has lost about 5.6% over the past three months, while slipping 1.3% year to date.

The downside in the stock price surely hints at some weaknesses in the company's operations. So let's delve deeper and see what is not right at FEMSA.

What's Wrong with FEMSA?

The company continues to struggle with adverse currency fluctuations, which have been weighing on Coca-Cola FEMSA's results for a while now. Also, soft Heineken performance has been a hurdle in the past two quarters, impacting the company's results.

A look at FEMSA's bottom-line performance unveils a dreary picture. Though the bottom line met our estimate in the last reported quarter, the same underperformed the Zacks Consensus Estimate prior to that for three straight quarters. In fact, over the trailing four quarters, earnings fell short of the Zacks Consensus Estimate by an average of 11.1%.

FOMENTO ECO-ADR Price and Consensus

FOMENTO ECO-ADR Price and Consensus | FOMENTO ECO-ADR Quote

Further, the company has been witnessing pressurized margins owing to growth of lower-margin businesses. As evidence, in the first quarter of 2016, the gross margin shriveled 310 basis points (bps) to 36.3%, whereas the consolidated operating margin contracted 110 bps to 7.9%. This mainly resulted from the incorporation and growth of lower-margin businesses in FEMSA Comercio's Health and Fuel divisions.

Apart from this, continued regulatory pressure can lead to significant attrition in the Mexican soda market, which may have a material impact on FEMSA's business. Also, it faces intense competition in the beverage segment from local and regional players. To retain the existing market share, the company may have to reduce its sales prices, which could dent margins further.

We remain skeptical about FEMSA's ongoing performance as persistence of the aforementioned headwinds may impact results. These worries have also caused downward estimate revisions as analysts turned less constructive on FEMSA's future. Notably, the Zacks Consensus Estimate for the second quarter of 2016 has declined 8.3% to 66 cents, since the earnings release.

However, to save itself from losing further ground, the company is taking prudent steps to diversify its product portfolio while expanding its small-box retail segment, which bodes well for the future. Particularly, the company is widening its exposure in the drugstore business, which currently contributes about 10% to FEMSA's total revenue. In fact, considering the importance of its drugstore operations, management also split the reporting divisions of FEMSA Comercio into three – Fuel, Health and Retail for enhanced presentation and clarity.

Well, let's wait and see if these turnaround efforts can actually bring FEMSA out of troubled waters.

Stocks to Consider

Better-ranked stocks in the same industry include Primo Water Corporation PRMW, with a Zacks Rank #1 (Strong Buy) and Pepsico, Inc. PEP, with a Zacks Rank #2 (Buy). Another well-ranked stock in the related beverage-alcohol industry is Compania Cervecerias Unidas S.A. CCU, with a Zacks Rank #1.

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