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Will FEMSA's (FMX) Strategies Help Gain Stock Momentum?
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Fomento Económico Mexicano, S.A.B de C.V. (FMX - Free Report) , alias FEMSA, has been in the red zone for quite a while now as evident from the fall in its stock price. This leading Latin American beverage company has lost about 13.5% in the last three months, while it slumped nearly 18.1% year to date.
Further, the stock has underperformed the Zacks Categorized Beverages – Soft Drinks industry, which has witnessed a decline of about 3.2% year to date. This Zacks Rank #3 (Hold) stock also touched its 52-week low mark of $74.77 on Dec 19, before closing a notch higher at $75.68.
The downside in the stock price surely hints at some weaknesses in the company’s operations. So let’s delve deeper and see what is not right at FEMSA.
What’s Hurting the Stock?
FEMSA continues to struggle mainly due to the adverse currency fluctuations, which have been weighing on its subsidiary Coca-Cola FEMSA's (KOF - Free Report) results for a while now.
Further, the company has been witnessing strained margins owing to growth of lower-margin businesses. As evidence, in the third quarter of 2016, the gross margin shriveled 270 basis points (bps) to 36.5%, whereas the consolidated operating margin contracted 150 bps to 9.3%. This mainly resulted from the incorporation and growth of lower-margin businesses in FEMSA Comercio’s Health and Fuel divisions along with a decline in Coca-Cola FEMSA’s gross margin.
Apart from this, continued regulatory pressure can lead to significant attrition in the Mexican soda market, which may have a material impact on FEMSA’s business. Moreover, it faces intense competition in the beverage segment from local and regional players. To retain the existing market share, the company may have to reduce its sales prices, which could dent margins further.
Strategic Measures Look Good
However, FEMSA remains on track to drive growth through its strategic measures, which include increasing store count, diversifying its business portfolio and focusing on core business activities. Further, the company has been taking prudent steps to diversify its product portfolio while expanding its small-box retail segment, which bodes well for future operating performance.
FEMSA has been focused particularly on expanding its drugstore operations, which currently accounts for nearly 10% of FEMSA’s consolidated revenues, as it sees significant potential in that space. The company has been aggressively seeking to capitalize on the growing drugstore business in Mexico. In the third quarter of 2016, the company added 67 net new stores to its recently formed FEMSA Comercio – Health division, including a small acquisition in Colombia. We believe FEMSA’s venture into the drugstore business strategically fits its chain store business, and will be accretive to both its top and bottom line in the long term.
Additionally, the company’s strong cash flow generation capacity enables it to make incremental investments in business expansion.
Dean Foods, with a long-term earnings growth rate of 12%, has surged nearly 27.8% year to date.
Ollie's Bargain has gained a whopping 77% year to date. Moreover, it has a long-term earnings growth rate of 18.9%.
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Will FEMSA's (FMX) Strategies Help Gain Stock Momentum?
Fomento Económico Mexicano, S.A.B de C.V. (FMX - Free Report) , alias FEMSA, has been in the red zone for quite a while now as evident from the fall in its stock price. This leading Latin American beverage company has lost about 13.5% in the last three months, while it slumped nearly 18.1% year to date.
Further, the stock has underperformed the Zacks Categorized Beverages – Soft Drinks industry, which has witnessed a decline of about 3.2% year to date. This Zacks Rank #3 (Hold) stock also touched its 52-week low mark of $74.77 on Dec 19, before closing a notch higher at $75.68.
The downside in the stock price surely hints at some weaknesses in the company’s operations. So let’s delve deeper and see what is not right at FEMSA.
What’s Hurting the Stock?
FEMSA continues to struggle mainly due to the adverse currency fluctuations, which have been weighing on its subsidiary Coca-Cola FEMSA's (KOF - Free Report) results for a while now.
Further, the company has been witnessing strained margins owing to growth of lower-margin businesses. As evidence, in the third quarter of 2016, the gross margin shriveled 270 basis points (bps) to 36.5%, whereas the consolidated operating margin contracted 150 bps to 9.3%. This mainly resulted from the incorporation and growth of lower-margin businesses in FEMSA Comercio’s Health and Fuel divisions along with a decline in Coca-Cola FEMSA’s gross margin.
Apart from this, continued regulatory pressure can lead to significant attrition in the Mexican soda market, which may have a material impact on FEMSA’s business. Moreover, it faces intense competition in the beverage segment from local and regional players. To retain the existing market share, the company may have to reduce its sales prices, which could dent margins further.
Strategic Measures Look Good
However, FEMSA remains on track to drive growth through its strategic measures, which include increasing store count, diversifying its business portfolio and focusing on core business activities. Further, the company has been taking prudent steps to diversify its product portfolio while expanding its small-box retail segment, which bodes well for future operating performance.
FEMSA has been focused particularly on expanding its drugstore operations, which currently accounts for nearly 10% of FEMSA’s consolidated revenues, as it sees significant potential in that space. The company has been aggressively seeking to capitalize on the growing drugstore business in Mexico. In the third quarter of 2016, the company added 67 net new stores to its recently formed FEMSA Comercio – Health division, including a small acquisition in Colombia. We believe FEMSA’s venture into the drugstore business strategically fits its chain store business, and will be accretive to both its top and bottom line in the long term.
Additionally, the company’s strong cash flow generation capacity enables it to make incremental investments in business expansion.
Stocks to Consider
Better-ranked stocks in the broader consumer staples sector include Dean Foods Co. and Ollie's Bargain Outlet Holdings Inc. (OLLI - Free Report) , both sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Dean Foods, with a long-term earnings growth rate of 12%, has surged nearly 27.8% year to date.
Ollie's Bargain has gained a whopping 77% year to date. Moreover, it has a long-term earnings growth rate of 18.9%.
Zacks' Top Investment Ideas for Long-Term Profit
How would you like to see our best recommendations to help you find today’s most promising long-term stocks? Starting now, you can look inside our portfolios featuring stocks under $10, income stocks, value investments and more. These picks, which have double and triple-digit profit potential, are rarely available to the public. But you can see them now. Click here >>