"Things Go Better with Coke" may be a Coca-Cola (KO) marketing slogan from the 1960s, but it's definitely true today for the company's operations in Mexico. Mexico's increasing middle class is a big consumer of the company's products.
Mexico is the largest per-capita consumer of Coca-Cola in the world, and second only to the United States in total consumption of Coca-Cola products. As reported by the Coca-Cola Company, the average per-capita annual consumption of Coca-Cola products, based on 8 ounce servings, was 728 in Mexico, compared to 403 in the United States and an average of 92 worldwide.
The question for investors is how to best take advantage of this huge and growing demand for Coca-Cola products in Mexico. Possible investment directions include purchasing the shares of Atlanta based Coca-Cola Company; by buying the shares of the Mexican bottler, Coca-Cola Femsa (KOF), which is the largest Coca-Cola bottler in the world; or by buying shares of Fomento Económico Mexicano (FMX), which is commonly referred to as FEMSA, and which itself owns 50% of Coca-Cola Femsa.
A Quick Look at Mexico's Economy
President Enrique Pena Nieto, the new leader of Mexico's government, has stated a desire to improve the country's economy which is Latin America's second largest and which outperformed Latin America's number one economy, Brazil, for the past two years. Despite the downturn in the global economy since the global economic crisis of 2008, Mexico's economic growth in recent years was a contributing factor to the record amounts of foreign investment that flowed into the country this year.
Mexico's finance minister, Luis Videgaray, indicated that the country's economy would grow 3.5% next year, after finishing this year with estimated growth of 4%. Nieto also indicated that he hopes to take advantage of being Latin America's best performing economy by seeking to increase economic growth to the 6% range.
Friday, Mexico's new government, led by President Enrique Pena Nieto, forecast a downturn in the country's economic growth for 2013, which he blamed on continuing Eurozone economic problems, and the yet unresolved political battle in the United States over the so-called "fiscal cliff." I don't see the slight downturn in Mexico's economic growth rate as much of a concern for investors, but instead as a "blip on the radar screen" from what I see as a trend of continuing, above global rates of growth for the country.
It's been a long-time in coming, but Mexico's middle class is fast becoming the majority in Mexico. Looking at investment opportunities in the country leads one immediately to the consumer driven portion of the economy. This then leads to Coca-Cola's products.
In January, Coca-Cola announced plans to invest more than $1 billion in 2012 in Mexico, as part of a $5 billion, five-year investment plan. Not only is this investment a major commitment to Mexico but an affirmation by the company of the importance of Mexico to its global growth strategy.
Coca-Cola's market capitalization is $169 billion, and at Friday's market close, the company's P/E was 19.71. The company's revenues for the third quarter of this year were $12.34 billion, down from the $13.085 billion of revenue in the previous quarter. The company's net income for the third quarter was $2.311 billion, compared to $3.033 billion in the prior quarter. While investing in Coca-Cola's shares is one way to get exposure to Mexico's growing demand for the company's products, it's not a 100 percent Mexican or for that matter Latin American "play." Here are two more direct ways to invest in the growing market for Coca-Cola products in Mexico and Latin America:
Coca-Cola Femsa is the largest Coca-Cola bottler in the world, and the Mexican franchisee of Coca-Cola. While investors typically think of Coca-Cola Femsa as a Mexican operation, the company produces, markets and distributes Coca-Cola beverages not just in Mexico but also in Guatemala, Nicaragua, Costa Rica, Panama, Colombia, Venezuela, certain areas of Brazil including most of São Paulo, and some parts of Argentina including Buenos Aires and surrounding areas.
Key shareholders of Coca-Cola Femsa are Fomento Económico Mexicano , which is commonly referred to as "FEMSA," and The Coca-Cola Company. FEMSA has 63% of the voting control of Coca-Cola Femsa, with The Coca-Cola Company having 37% of the voting control, and the public shareholders having no voting rights. With corporate governance being increasingly significant to investors worldwide, it's obviously not a plus that public shareholders lack voting rights. But the "economic" ownership is different from the voting rights. FEMSA has 50% of the economic ownership of Coca-Cola Femsa, The Coca Cola Company has 29% and public shareholders have 20.6%.
Coca-Cola Femsa has a market capitalization of $29.69 billion and a P/E of 31.36. The company's annual dividends are $1.93, which corresponds to a current yield of 1.3%.
For the third quarter of this year, the company's revenues were Ps. 36,193 million ($3.05 billion), an increase of 20.3% compared to the company's revenues in the third quarter of last year. This increase in revenues includes benefits from the integration of the financial results of three territorial business units, Grupo Tampico, Grupo CIMSA and Grupo Fomento Queretano into the company's Mexican operations. Without the integration of these companies, revenues increased 9.6%.
Operating income for the third quarter grew 26.6% to Ps. 5,487 million ($427 million), an increase of 26.5%, which includes the integration of the financial results off the three territorial business units. Without the integration of these companies, operating income grew by 18%.
Fomento Económico Mexicano
In addition to its ownership in Coca-Cola Femsa, Fomento Económico Mexicano or "FEMSA" is a key participant in Mexico's retail sector through its subsidiary, FEMSA Comercio.
FEMSA Comercio owns OXXO, which operates approximately 9500 stores, the largest chain of convenience stores in Latin America. The company opened 178 net new stores during the third quarter of this year, which brings the total of new stores opened in the prior twelve month period to 1,019.
FEMSA is also an indirect opportunity to participate in the global brewery industry. FEMSA is the second largest equity owner in Heineken (HINKY.PK), which has operations in 70 countries. FEMSA traded its brewery and beer business, which was the second largest in Mexico and the fourth largest in Brazil, for its 20% stake in Heineken.
In November, FEMSA announced that its subsidiary, FEMSA Comercio, was acquiring a 75% interest in Farmacias YZA, a leading drugstore chain with 333 stores in Southeast Mexico. FEMSA indicated that it expects the acquisition to be completed during the first quarter of next year. It's likely that the company may locate Farmacias YZA pharmacies in some of its OXXO convenience stores.
FEMSA has a stock market capitalization of $35.7 billion and a P/E of 28.01. The company pays an annual dividend of $1.40 per share, corresponding to a current yield of approximately 1.4%.
For the third quarter, FEMSA's revenues grew 18.1% to $4.523 billion. This included revenues from both the Coca-Cola Femsa and FEMSA Comercio operations. Just focusing on organic growth, the company's increase in revenues for the third quarter compared to last year's third quarter was 11.7%.
FEMSA's operating income increased substantially for the third quarter, by 24.4% to $560 million, from $484 billion for the same quarter of last year. The company's growth in its organic operating income for the third quarter over the same quarter of last year was 12.4%.
At first glance, the most direct way to invest in Coca-Cola's growth in Mexico would be directly by buying the shares of the bottler, Coca-Cola Femsa. But, for me it's a major concern that the shareholders who hold their ownership through the American Depositary Shares have no voting rights. I find this distasteful from a transparency and corporate governance perspective.
While not as a direct way, but perhaps a better way to invest in Coca-Cola's growth in Mexico would be to purchase the shares of Fomento Económico Mexicano. FEMSA does have voting rights for its ownership in Coca-Cola Femsa. FEMSA provides an opportunity to participate in Mexico's beverage industry. Also, through its OXXO convenience stores and its new Farmacias YZA pharmacy acquisition, it provides a strong investment opportunity in Mexico's and Latin America's retail sector. But, I don't believe that the stock market capitalization of FEMSA provides much value for the company's equity holdings in Heineken.
An additional potential upside for investors in FEMSA will be based on what the company does with its substantial ownership of Heineken, which is now subject to a shareholder lock-up agreement. I don't see FEMSA liquidating its holdings in Heineken short-term. But, from a longer-term perspective, I don't see company's equity position in Heineken as being core to FEMSA's operations or strategy. I believe it's likely that FEMSA will liquidate its holdings in Heineken and utilize the capital to further grow its operations in Mexico and in other countries in Latin America.
There are competitive products to Coca-Cola's products in Mexico. PepsiCo Inc. (PEP) is definitely a competitor. PepsiCo's Mexican bottler, Grupo Embotelladoras Unidas SAB (GEUPEC.MX) is proceeding with a $500 million placement in the U.S. and Mexico and filed a prospectus with the Mexican Stock Exchange on Thursday. The company is changing its name to Organizacion Cultiba SAB, and it will trade in Mexico under the ticker CULTIBA.MX. While it appears that about half of the placement proceeds will be utilized to repay debt, the other half will be used for corporate purposes. These other "corporate purposes" will likely include expanding its Mexican operations and therefore making the company more of a formidable competitor for Coca-Cola Femsa in Mexico.
Investing in companies in emerging markets, including Mexico, is not suitable for all investors and can be risky. It's important that investors thoroughly perform their own due diligence and analyze the potential risks.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in FMX over the next 72 hours.
Additional disclosure: Some conversions to U.S. dollars from Mexican Pesos are based on current exchange rates.