FEMSA Downgraded to Underperform - Analyst Blog

On Sep 26, 2013, we downgraded the Latin American beverage company, Fomento Economico Mexicano S.A.B de C.V. (FMX), to Underperform based on lower-than-expected bottom-line results in the past two quarters.

Why the Downgrade?

Estimates for FEMSA, the largest franchise bottler for The Coca-Cola Company (KO), have been declining since it reported second-quarter results on Jul 25. FEMSA's second-quarter fiscal 2013 earnings of $0.78 per share fell short of the Zacks Consensus Estimate of $1.22.

Following the release of second-quarter results, the Zacks Consensus Estimate for fiscal 2013 has gone down 3.6% to $4.02 per share. The Zacks Consensus Estimate for fiscal 2014 also declined 3.8% to $4.76. With the Zacks Consensus Estimates for both fiscal 2013 and 2014 going down, the company now has a Zacks #4 Rank (Sell).

Cause for Concern

Apart from the earnings decline, we remain cautious on the stock's future performance as FEMSA witnessed a meager rise of 0.9% in comparable-store sales of its OXXO stores, which exhibited the lowest growth since 2009. Moreover, the company has witnessed a fall in customer traffic during the quarter, for the first time since 2003.
 
Moreover, stiff competition from private players and rising commodity costs compel us to take a negative stance on the stock. In addition, the company's premium valuation limits the upside potential in the stock.

Given that The Coca-Cola Company has a 31.6% stake in the company, Coca-Cola FEMSA derives 90% of its sales from the former's trademark beverages.  This gives The Coca-Cola Company a significant advantage over the company's operations.  Thus, there may be a certain conflict of interest between the two companies, which may result in Coca-Cola FEMSA taking actions, which can be detrimental to the interests of its remaining shareholders.

Other Stocks to Consider

Other stocks worth considering in the beverage industry are Coca-Cola Enterprises Inc. (CCE) and Coffee Holding Company Inc. (JVA). Coca-Cola Enterprises has a Zacks Rank #2 (Buy), while Coffee Holding Company carries a Zacks Rank #3 (Hold).