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FEMSA Has Value Here, But Corporate Strategy Is Now Controversial

Stephen Simpson profile picture
Stephen Simpson


  • FEMSA saw a sharp decline in same-store sales at OXXO in April, but full-year comps should remain positive and profitability should remain healthy.
  • Management's decision to expand into the U.S. janitorial/sanitation distribution market will drive more worries about capital allocation, but FEMSA may see itself as primarily a supply-chain/distribution story.
  • FEMSA shares look undervalued on the basis of the core Coca-Cola FEMSA and OXXO operations.

With global economies breaking under the strain of Covid-19, consumer staples like soda, beer, and the like should hold up better on balance. Add in currency risk and worries about the health of the Mexican economy (and the Mexican consumer) and corporate capital allocation decisions, though, and you have a decidedly less supportive environment for FEMSA (NYSE:FMX) these days.

I think I can see where FEMSA management is going with its recent capital allocation decisions, but the fact remains that these are significant allocations of capital outside of what FEMSA does best, with little-to-no explanation from management as to why they haven’t decided to expand the OXXO concept more aggressively. What’s more, beer and sodas that aren’t drunk today don’t benefit from “catch up” spending later. With that, my fair value for FEMSA is lower now, though I do think the market has over-corrected here to a point where it is undervalued on the core operations.

A Decent-To-Good First Quarter

Despite some operating challenges, FEMSA came through with a decent or better quarter in the first quarter of this year. Revenue missed by about 3%, largely driven by Coca-Cola FEMSA (KOF), but strong profitability at the OXXO business helped drive a small beat at the EBITDA line, while stronger forex benefits from a larger U.S. dollar position drove a larger reported earnings beat.

Revenue rose more than 5% as reported and a little less than 3% in organic terms. Overall gross margin improved by 60bp, helping drive an 11% improvement in reported operating income and a 10% improvement in EBITDA (8% in organic terms).

Coca-Cola FEMSA revenue declined about 2% this quarter, with a small volume decline in Mexico/Central America (down 0.3%) offset by better pricing (up more than 3%), while Brazil revenue declined 10% on a 3% volume decline. Gross margin improved half a point, while EBITDA grew more

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).

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.

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