FEMSA Delivers Strong 3Q

Fomento Economico Mexicano S.A.'s (FMX - Analyst Report) third-quarter 2011 net income from continuing operation surged 16.6% to MXN 5,896.0 million ($481.1 million) from MXN 5,057.0 million ($395.0 million) in the year-ago period, primarily resulting from an increase in comparable income from operation, inclusion of 20% economic interest in Heineken Group and favorable currency translations.

Total revenue grew 18.8% year over year to MXN 50,807.0 million ($4,145.9 million). The increase was mainly attributable to revenue growth at Coca-Cola FEMSA and FEMSA Comercio.

Total revenue at Coca-cola FEMSA grew by 18.1% to MXN 30,332.0 ($2,475.1 million) million in the quarter, primarily driven by increased per unit average price and volume growth in Mexico, Columbia and Argentina.

FEMSA Comercio registered a revenue growth of 19.7% to MXN 19,410.0 million ($1,583.9 million), mainly due to the opening of 185 net new stores in the quarter, reaching 1,137 net new stores in the last one-year period coupled with an increase of 9.2% in same-store sales.

FEMSA’s gross profit recorded a growth of 17.8% year over year, while gross margin contracted 30 basis points (bps) to 41.8%. The decline was primarily the result of a raw-material cost pressures at Coca-Cola FEMSA, which partially offsets the gross profit improvement at FEMSA Comercio.

Operating expenses as a percentage of total revenue remains flat year over year at 29.1% primarily due to lower expenses related to selling at Coca-Cola Femsa, fully offset by higher costs at FEMSA Comercio. However, FEMSA posted a 16.0% year-over-year growth in operating income to MXN 6,459.0 million ($527.1 million).

At the end of the third quarter, the company had cash and cash equivalents of MXN 35,386.0 million ($2,944.1 million) compared with MXN 25,842.0 million ($2,031.2 million) in the year-ago period. Long-term debt (including current maturities) at the end of the quarter was MXN 27,650.0 million ($2,300.5 million), reflecting a capitalization ratio of 14.3%.

FEMSA currently retains a Zacks #2 Rank, which translates to a short-term 'Buy' rating. However, we maintain a long-term 'Neutral' recommendation on the stock.

Read the full analyst report on FMX