Filed Under:
Tickers in this Article: FMX, KOF, KO, PEP, DPS, CASY, C.ATD.B
It's been a year since Heineken bought Femsa's (NYSE:FMX) beer operations for $7.8 billion. At the time, I suggested Femsa shareholders celebrate the deal, which gave them 20% of Heineken stock in return. I reasoned that there was tremendous upside from the deal, including the elimination of $2.1 billion in debt from the beer operations as well as allowing it to focus on its Coca-Cola Femsa (NYSE:KOF) and Oxxo convenience store businesses. It was a win/win deal for both companies. Now, let's look at what's happened to Femsa since and what shareholders can look forward to in the future. (For the original article, see Does The Heineken Deal Taste Good To Femsa?)

IN PICTURES: World's Greatest Investors

Mediocre Return
Femsa stock was up 18.1% in 2010, which is better than the S&P 500 but not near what I expected. Frankly, it's hard to put a finger on what kept its stock from outperforming because its results were more than acceptable, if not spectacular. It had a good year, but I guess investors didn't see nearly enough excitement to drive it higher. In the beverage department, Coke (NYSE:KO), Pepsi (NYSE:PEP) and Dr. Pepper Snapple (NYSE:DPS) were up 18.5%, 11.4% and 27.4% respectively, and 53%-owned Coca-Cola Femsa (NYSE:KOF) gained 27.2%. Comparable convenience store operators include Casey's General Stores (Nasdaq:CASY) and Alimentation Couche-Tard (TSX:C.ATD.B), up 34.5% and 30.8% respectively. All but Pepsi equaled or bettered its performance. Perhaps 2011 will be brighter.

Store Openings
In the third quarter ended September 30, 2010, Oxxo opened 180 new stores to go along with 837 it opened in the previous nine-months, for 1,017 in the past 12-months. A result of this huge undertaking is that it now has over 8,000 stores and is the largest company-operated convenience store chain in the Americas. Only 7-Eleven is larger and most of its stores are franchises. Revenues for the first nine months of the year were up 15.3% to $3.6 billion, same-store sales increased 4.3% and income from operations grew 15% to $253.4 million. Management intends to have 12,000 stores in place by the end of 2014, a rate of 1,000 per year to reach its goal. By growing both the store base and traffic while also increasing the sales and margins at each unit, Oxxo will contribute nicely to Femsa's long-term revenue growth.

Coke Is It
Revenues at Coca-Cola Femsa, the largest public bottler of Coke outside the U.S., were up 2.4% in the first nine-months of the year to $5.9 billion, while operating income grew 8.8% to $942.5 million. While Oxxo's operating margins stayed the same at 7.1%, Coca-Cola Femsa's actually improved 90 basis points to 15.9%. The bottler contributed 62.3% of revenues and 78.8% of operating profits. Interestingly, although Mexico accounts for 50% of Coca-Cola Femsa's revenues, EBITDA profits are evenly split between Mexico, Central America and South America. It's no longer just a Mexican company. In fact, it produces 35% of all Coke beverages sold in Latin America. As it continues to grow in these areas, it's focusing on popular, higher margin brand categories like energy drinks, teas and juices.

Bottom Line
An article in October pointed out that Femsa underperforms Coca-Cola Femsa because it's a holding company and its stock is discounted as a result. While this might be true, it presents a buying opportunity because as long as it trades below the value of the sum of its parts, investors are getting a deal. Bill Gates owns a large position in this stock and I don't imagine he's selling anytime soon. Eventually, good things come to those that wait, and Femsa has shown it's worth waiting for.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

comments powered by Disqus

Trading Center