By Joseph Hogue CFA
Coca Cola (KO) is doubling down on the Latin American consumer with a $1.3 billion investment in Chile over the next five years. The beverage powerhouse, along with its local bottling partner Embotelladora Andina, has already built a new $200 million plant and will make significant investments in sustainability projects.
The Chilean bottler is Coca-Cola’s second largest partner in the region after a merger with Embotelladora Polar earlier this year. It produces and distributes products throughout Chile, Argentina and Brazil.
Coca Cola is already a dominant player in Latin America with Fomento Economico Mexicano (FMX), which owns 53.7% of Coca-Cola FEMSA (COCSF.PK) and makes it the world’s second largest bottler of Coke products. FEMSA operates in nine countries throughout Latin America including: Argentina, Brazil, Guatemala, Colombia, Costa Rica, Nicaragua, Panama, Venezuela and Mexico. The parent company recently announced a 75% stake in Farmacias YZA, a leading drugstore chain in Mexico. The addition of the pharmacy business will augment an already large retail segment that boasts the largest convenience store chain in Latin America.
Shares of FEMSA have outperformed both the Chilean bottler and Coca-Cola over the last year. FEMSA shares have increased 45% versus a 35% rise in shares of Embotelladora Andina and a more modest 10% in shares of Coca Cola.
On a valuation basis, the two bottling partners are starting to look a little expensive. Shares of FEMSA trade for 26.1 and pay a 1.5% dividend yield. Shares of Embotelladora Andina trade relatively cheaply at 21.6 times earnings and a 1.7% dividend yield while shares of Coca-Cola trade for 19 times earnings with a 2.8% dividend yield.
While the companies should do well with the coming 2014 World Cup and 2016 Summer Olympics in Brazil, investors may want to gradually build a position in case shares come down from their current multiples.