If you look at the holdings of the Bill and Melinda Gates Foundation, you'll notice that many are household names. One of the most interesting inclusions is Coca-Cola Fesma (NYSE:KOF), the largest Coca-Cola (NYSE:KO) bottler in Latin America.

The foundation owns 3.78 million American depository shares and is the biggest stockholder after Fomento Economic Mexicano SAB (FESMA) (NYSE:FMX), which owns 53.7%, and Coca-Cola at 31.6%. Only 14.7% of the stock is in the hands of the public.

In addition to the foundation's holdings, Gates' investment vehicle, Cascade Investment, owns another 77,000 shares. Perhaps Bill Gates made the purchase based on his friend Warren Buffett's recommendation. After all, Berkshire Hathaway (NYSE:BRK.A, BRK.B) owns 8.61% of the big brother. (For further reading on Buffett's investing style, check out Think Like Warren Buffett and Warren Buffett: How He Does It.)

Fast Learner
Coca-Cola Fesma is less than 30 years old. It got its start when majority owner FEMSA acquired some Mexican soft drink assets in 1979. Those assets had a maximum production capacity of 83 million cases. In 2007, the company's total sales volume was 2.12 billion cases.

A great deal of this growth came in December 2002, when the company acquired its much bigger South American rival, Panamco for $2.7 billion. To make the deal, it borrowed $2.05 billion from JPMorgan (NYSE:JPM). At the time of the announcement, its stock dropped more than three dollars to $17.53. It seems Mr. Market felt the company overpaid for the Latin American bottler, saddling the merged entity with excessive debt.

The Markets Were Wrong
Since the acquisition, Coca-Cola Fesma has been on a tear. Sales at the end of 2002 (before the merger was complete) were 17.5 million pesos. At the end of 2007, they were 69.25 million pesos. The EBITDA compound annual growth rate in the last 10 years is 17%, helping to reduce total debt from $2.4 billion in 2003 down to $1 billion in 2007. Eighty percent of revenue growth is now outside Mexico, with the Mexican business accounting for just over 50% of total revenue with the other half coming from Brazil, Colombia, Argentina, and the rest of Central America.

To expand its hold on Latin America, it bought juice company Jugos Del Valle for $380 million in November 2007. With approximately $445 million in sales, it is the second largest juice company in Mexico and will be a platform for growing the non-carbonated business.

Buy the Numbers
Revenue was up 6.4%, and operating income increased 15.7% in Q1 2008, ended March 31. Sales volume by case grew 3.8% to 517.7 million with the average case price increasing 2.0% in the quarter to $3.06. Gross margins increased 140 basis points year-over-year to 47.9% in the first quarter with operating margins improving 130 basis points to 16.3%. EBITDA earnings were up 11.8% year-over-year.

Its solid performance has analysts taking notice. In the first quarter, Coca-Cola Fesma reported EPS of 80 cents per share, two cents better than analyst expectations. Zacks.com believes Coca-Cola Fesma is still an attractive buy raising its target price to $68.25. The combination of better-than-expected first quarter earnings with the potential growth of the Latin America market makes it a worthwhile investment. (To learn more on decoding these numbers, follow our tutorial Advanced Financial Statement Analysis.)

Takeover Talk
The stock had a good run this past year, up 52%. Despite this jump in price, its valuation is still reasonable, with the stock currently trading at 1.68 times sales, 2.31 times book value and a PEG ratio of 1.2. In Coca-Cola Fesma, you have a company that accounts for 10% of Coca-Cola's global sales, 40% of its Latin American business and is Coke's second biggest bottler worldwide. FEMSA's investment in the soft drink business generates 40% of its revenue and 60% of its profits.

Barron's writer Christopher Williams pointed out the attractiveness of majority owner FESMA as a takeover target for someone looking to enter the Latin American beer market. Any buyer would likely spin off the non-beer assets, leaving Coca-Cola Femsa to operate as an independent company. Time will tell. (For tips on discovering big prospects ahead of time, read Trademarks Of A Takeover Target and Pinpoint Takeovers First.)

Bottom Line
Countries like Brazil drink fewer Coca-Cola products than in Mexico and the United States, according to the New York Times, making expansion into Latin America a long-term winner. The financial results since the Panamco acquisition show this to be a valid opinion. Warren Buffett may very well have whispered in his friend Bill's ear, but the numbers speak for themselves.

Related Articles
  1. Economics

    How Warren Buffet Made Berkshire Hathaway A Winner

    Berkshire Fine Spinning Associated and Hathaway Manufacturing Company merged in 1955 to form Berkshire Hathaway.
  2. Investing News

    What Does the Fire Monkey Mean for Your Portfolio?

    The Chinese new year this year corresponds to the monkey, a quick-witted, playful, tricky figure that means well but has a penchant for causing trouble.
  3. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  4. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  5. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  6. Retirement

    Warren Buffett's Investment Lessons for Retirees

    For those in retirement, Warren Buffett's clear, timeless advice on investing is worth a look.
  7. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  8. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  9. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  10. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
Trading Center