Femsa Keeps Chugging Along

By Will Ashworth | April 17, 2012 AAA
I last discussed Mexican Economic (Femsa) (NYSE:FMX) in January 2011. At the time, I was surprised how little its stock had appreciated in 2010, given its excellent results that year. Fast forward to 2012 and its business continues to grow. Up 18.5% year-to-date as of April 16, 2012, it's outperforming the S&P 500 for the fifth consecutive year. Read on and I'll explain why its stock will keep chugging along.

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Femsa and Peers - Stock Performance - 2011

Company

Total Return

Femsa

25.6%

Coca-Cola (NYSE:KO)

9.2%

PepsiCo (NYSE:PEP)

4.7%

Dr. Pepper Snapple (NYSE:DPS)

15.7%

Casey\'s General Stores (Nasdaq:CASY)

22.5%

Soft Drinks

Femsa owns 53.7% of Coca-Cola Femsa (63% of the votes), Coca-Cola owns another 31.6% and investors own the remaining 14.7%. In March 2011, Coca-Cola Femsa acquired Grupo Industrias Lácteas, a Panamanian dairy and juice producer. It is its first foray into dairy products, one of the most important segments in the worldwide non-alcoholic beverage industry. The other highlight was its purchase of three family-owned Coca-Cola bottling operations in Mexico, which adds 425 million unit cases of beverages.

The four deals cost Coca-Cola Femsa 28 billion pesos or US$2 billion. Revenues in 2011 grew 20.5% to 124.7 billion pesos ($8.94 billion) while income from operations increased 18% to 20.2 billion pesos ($1.44 billion). Possibly the most interesting news was its February announcement that it has entered into a 12-month agreement with Coca-Cola to negotiate the purchase of Coca-Cola's 100%-owned bottling subsidiary in the Philippines. Coke paid $590 million for the remaining 65% it didn't own in 2007.

Moody's worry is that Coca-Cola Femsa is spreading itself too thin; however, I think it's much ado about nothing. Coke owns a good chunk of Coca-Cola Femsa and won't do the deal if it thinks it would hurt its Latin American investment. Franky, business has never been better.

Convenience Stores

Femsa Comercio, which operates the OXXO convenience store chain, had a very nice year. First, it opened 1,135 new stores in 2011, bringing its total store count in Mexico to 9,561. That obviously helped on the top line, but so too did its same-store sales, which rose 9.2% last year. In addition, store traffic increased by 4.6% and the average customer ticket 4.3%. The combination produced a 19% increase in total revenues to 74.1 billion pesos ($5.3 billion) with a 20.7% increase in operating income to 6.3 billion pesos ($451.6 million). During the past year it opened stores in non-traditional locations, like airports and shopping malls, and continued to test its store concept in Bogota, Columbia. Given its OXXO stores still have a relatively low rate of penetration in Mexico, domestic expansion is still at the top of its list. As it gets better at opening stores, profits will only increase.

Overall

The benefits from the Heineken divestiture in 2010 have yet to be fully felt; both in terms of the capital redeployed in its two existing businesses and Heineken's deeper expansion into Latin America. Nonetheless, total revenues grew 19.6% in 2011 to 203 billion pesos ($14.6 billion) with a 19.4% increase in operating income to 26.9 billion pesos ($1.9 billion). Its two operating businesses are very complimentary, in the sense that the OXXO stores generate a very high return on assets but a relatively small operating profit; whereas Coca-Cola Femsa generates a lower return on assets, but a much higher profit in terms of pesos. Its Heineken investment will act like an annuity in the future, paying out a little bit every year to live on. Shareholders can take pride in the fact it added 23,661 jobs in 2011, an increase of 15.4%. How many companies in North America can make that claim? Very few I would think.

The Bottom Line

In March 2011, it was announced that Bill Gates acquired 14.7% of Femsa's stock. Gates also owns a big chunk of Coca-Cola Femsa. Long-term, which is the only way Gates invests, Femsa is a winner, no matter how you feel about its current valuation. As I said in the beginning: it just keeps chugging along.

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At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.

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