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.)
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.)
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.)
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.