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FEMSA Continues To Offer Attractive Value

Stephen Simpson profile picture
Stephen Simpson


  • FEMSA's fourth quarter results had a few soft spots, but overall the revenue and margin performance was fine, as OXXO continues to deliver reliable growth.
  • Coca-Cola FEMSA saw some volume weakness in Mexico, but improved results from Brazil suggest the turnaround efforts there are working.
  • The drugstore and gas station operations remain long-term works in progress, and the drugstore business likely still needs meaningful M&A to reach attractive operating scale.
  • FEMSA shares continue to look undervalued below $105 to $115, though 2018 could be a more turbulent year due to the election cycle and other macroeconomic factors.

Shares of FEMSA (NYSE:FMX), a large Mexican consumer conglomerate, are always going to twitch with concerns about Mexico's economy (including the exchange rate with the U.S.), but management has demonstrated over the years that it knows how to build value for shareholders. Recent endeavors like drugstores and gas stations will take time to mature, but the underlying growth story for the company remains intact.

I continue to believe that $105 to $115 is a good fair value range for the ADRs and that opportunities to buy below $100 should be considered by investors who want some exposure to emerging market (especially Mexican) consumer spending growth. Although 2018 could be a little more challenging due to political issues, I believe high single-digit growth potential continues to support a healthy outlook for double-digit long-term returns.

Q4 Results - Certainly Not Perfect, But Not That Bad Either

In my opinion, FEMSA's results were disappointing only in the context of the company's recent track record - this wasn't a great quarter, but it certainly wasn't a bad one.

Revenue rose 3.5% on an organic basis, with weakness at Coca-Cola FEMSA (KOF) weighing on the results. Coca-Cola FEMSA saw organic revenue contract 4% (though it was up almost 6% on a comp basis), while OXXO revenue rose 10%, drugstore ("Health") revenue rose about 2%, and gas station ("Fuel") revenue rose 26%. All told, FEMSA's results were below the average sell-side estimate by an amount that would otherwise fall within rounding error (less than 1%, though different sources report different "consensus" estimates).

Margins were okay for the most part, highlighted by the company not seeing as much margin pressure/erosion as expected. Gross margin actually improved 70bp, with better results in every business and a nice boost from Health. EBITDA rose 8% from last year, while operating income rose by a little less

This article was written by

Stephen Simpson profile picture
Stephen Simpson is a freelance financial writer and investor. Spent close to 15 years on the Street (sell-side, buy-side, equities, bonds); now a semi-retired raccoon rancher. That last part isn't entirely true. Probably.

Analyst’s Disclosure: I am/we are long FMX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (1)

Panzerman profile picture
Good write up. FMX is agreat opportunity to be involved in the growth of Mexico. NAFTA will continue with likely small modifications, do I do not see that as anymore than temporary paranoia. The election is more of a concern but with the PRI's well oiled machine, the leftist will lose out as usual. My main complaint with FMX is a small dividend and a somewhat lacklustre stock. With OXXO, gas stations, Heineken and the Coca Cola position, I do not know what is keeping the stock down.
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