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Here’s What Makes FEMSA (FMX) a Good Investment Choice Now

Zacks

Fomento Economico Mexicano, S.A.B. de C.V. FMX, alias FEMSA, regained momentum in the past month driven by strategic actions, including expanding store base, diversifying business portfolio and focus on core business activities. This makes FEMSA a good investment choice as the stock continues the uptick.

Notably, this Zacks Rank #3 (Hold) stock surged 10.6% in the past month, outperforming the industry’s growth of 1.6%. This indicates a positive sentiment on the stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.


However, we cannot ignore the near-term headwinds that may bother the stock’s growth. These mainly include the dismal top- and bottom-line trends as well as the continued decline in margins. Let’s analyze why we should retain the stock at this time.

Strategic Actions – Business Diversification

FEMSA has been taking prudent steps to diversify the product portfolio while expanding in the small-box retail segment, which bodes well for future operating performance. In an attempt to strengthen its retail portfolio, the company acquired Santiago-based grocer Big John, which is likely to enhance FEMSA Comercio’s convenience store operations in Chile.

FEMSA has been focusing on achieving growth via acquisitions for a while now. Earlier, it spread footprint in South America through the Grupo Socofar buyout, which not only widened its exposure in the drugstore business but also brought beauty operations under ambit. Additionally, the company has been diversifying retail-chain format operations by acquiring businesses across Latin America. FEMSA Comercio considerably extended footprint in the small-format retail chains in Mexico, Chile and Colombia.

Health Unit to Back growth

FEMSA has been focusing on expanding drugstore operations as it sees significant potential in that space. The company has been aggressively seeking to capitalize on the growing drugstore business. As of Dec 31, 2017, it had total 2,225 point of sales across all regions, of which, 47 net new stores were added during the fourth quarter. Further, FEMSA is on track to build infrastructure and integrate its four legacy drugstore operations, including Farmacias YZA, Farmacias FM Moderna and Farmacias Farmacón as well as Grupo Socofar, into a single operating platform. We believe, FEMSA’s venture into the drugstore business strategically fits its chain-store business and will be accretive to both top and bottom lines in the long term.

Healthy Financials

Moreover, FEMSA's strong cash flow generation capacity and a healthy balance sheet enable it to make incremental investments in business expansion. The company is effectively utilizing available funds to grow core bottling and convenience store operations while expanding organic and inorganic businesses.

Solid Business Portfolio

FEMSA is a leading company with exposure in various industries, including beverage, beer and retail, which give it an edge over competitors. The company mainly gains exposure in the beverage industry through Coca-Cola FEMSA S.A.B. de C.V. KOF, which operates as world’s largest franchise bottler for Coca-Cola KO products. In the beer industry, it enjoys a notable position by owning 14.76% in Heineken HEINY, a leading brewer with operations in 70 countries.

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

Near-Term Hurdles

Though the company’s long-term growth prospects remain intact, its negative surprise history remains a hurdle. It posted lower-than-expected earnings and sales for fourth-quarter 2017, which marked fifth negative earnings surprise in the trailing six quarters. Moreover, revenues lagged estimates in three of the last four quarters. Results were hurt by the change in the accounting method for Coca-Cola FEMSA’s Venezuelan operation. Further, the company has been witnessing strained margins due to higher operating expenses at Coca-Cola FEMSA and FEMSA Comercio’s Retail division. We believe that persistence of these headwinds can be troublesome for the stock.


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