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FEMSA’s (FMX) Strategic Measures Drive Growth: Time to Hold?

Zacks

Fomento Economico Mexicano, S.A.B. de C.V. FMX, alias FEMSA, is doing well on the back of its strategic measures such as increasing store count, diversifying business portfolio and focusing on core business activities to drive growth.

We suggest holding on to the stock, which is marching ahead of its industry now. Shares of FEMSA jumped 25.6% year to date, outperforming the Zacks categorized Beverages – Soft Drinks industry’s gain of 12.3%. Further, the stock is supported by a long-term earnings growth rate of 12.5%, which justifies its growth prospects.



While the Zacks Consensus Estimate of 82 cents for second-quarter 2017 has declined by 1 cent in the last 30 days, it represents a 10.8% growth year over year. Further, analysts polled by Zacks expect revenues of $6.3 billion for the second quarter, up nearly 20.4% from the prior-year period.

What’s Driving the Stock?

Armed with a solid business portfolio, FEMSA is a leading company with exposure in various industries including beverage, beer and retail, which gives it an edge over its competitors. The company mainly gets exposed to the beverage industry through Coca-Cola FEMSA S.A.B. de C.V. KOF, which operates as the world’s largest franchise bottler for The Coca-Cola Company KO products. Moreover, it enjoys a notable position in the beer industry as it owns the second largest stake in Heineken NV HEINY, a leading brewer with operations over 70 countries.

Moreover, its share in the retail space relates to the operation of various small-format store chains including OXXO, through its FEMSA Comercio subsidiary. Apart from these, FEMSA provides logistics, point-of-sale refrigeration solutions and plastics solutions to its business units and third-party clients through FEMSA Strategic Businesses subsidiary.

We note that FEMSA has been taking prudent steps to diversify product portfolio while expanding its small-box retail segment, which bodes well for future operating performance. Additionally, the company has been focused on expanding drugstore operations as it sees significant potential in that space. Moreover, it has been aggressively seeking to capitalize on the growing drugstore business. As of Mar 31, 2017, the company had a total of 2,136 point of sales across all regions, of which 16 net new stores were added in the first quarter.

Further, it is on track with its efforts to build infrastructure and integrate its four legacy drugstore operations into a single operating platform. These include its previously acquired Mexican drugstore business – Farmacias YZA, Farmacias FM Moderna and Farmacias Farmacón – as well as South America’s leading drugstore operator, Grupo Socofar.

We believe FEMSA’s foray into the drugstore business strategically fits its chain store business, and will be accretive to both the top line and bottom line in the long term. Moreover, FEMSA's strong cash flow generation capacity enables it to make incremental investments in business expansion.

Hurdles

However, the company has lagged earnings estimates for three straight quarters now. FEMSA has been facing difficult times, primarily due to currency headwinds, which has been weighing on Coca-Cola FEMSA for a while now. Further, the company has been witnessing pressurized margins owing to growth of lower-margin businesses. We believe that persistence of these headwinds and regulatory pressure may impact future results.

Fomento Economico Mexicano S.A.B. de C.V. Price, Consensus and EPS Surprise


Fomento Economico Mexicano S.A.B. de C.V. Price, Consensus and EPS Surprise | Fomento Economico Mexicano S.A.B. de C.V. Quote

Bottom Line

We believe FEMSA has the potential to efficiently overcome these hurdles by capitalizing on its growth drivers. Further, the company’s focus on achieving growth through acquisitions bodes well.

Currently, FEMSA carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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