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Here's Why Hold Strategy is Apt for FEMSA (FMX) Stock Right Now

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Fomento Economico Mexicano S.A.B. de C.V. (FMX - Free Report) , alias FEMSA, is well-placed for growth, owing to improved consumption patterns and strong business momentum resulting from the easing of restrictions across most markets. It is also poised for growth, driven by its focus on enhancing customer experiences through digital and technological advancements. The company’s growth via its acquisition strategy bodes well for the long term.

Driven by the above-mentioned factors, shares of FEMSA have rallied 11.5% in the year-to-date period compared with the industry’s growth of 7.7%. The Zacks Rank #3 (Hold) stock has also comfortably outperformed the Consumer Staples sector, which advanced 4.7% in the same period.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

In the past 30 days, the company’s estimates for 2021 and 2022 earnings per share have been unchanged. For fiscal 2021, its earnings estimates are pegged at $3.04 per share, suggesting substantial growth from 12 cents reported in the year-ago quarter.


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Factors Supporting Growth

FEMSA has exposure in various industries, including beverage, beer and retail, which gives it an edge over its competitors. The company participates in the beverage industry through Coca-Cola FEMSA (KOF - Free Report) , which is the world’s largest franchise bottler for Coca-Cola (KO - Free Report) products. In the beer industry, it enjoys a notable position with its 14.76% stake in Heineken (HEINY - Free Report) , a leading brewer, with operations in 70 countries.

The company’s share in the retail space relates to the operation of various small-format store chains, including OXXO, through its FEMSA Comercio subsidiary. Apart from these, FEMSA provides logistics, point-of-sale refrigeration solutions, and plastic solutions to its business units and third-party clients through its FEMSA Strategic Businesses subsidiary.

FEMSA’s trends across its business units and markets have been improving, owing to the recovery in consumption as consumers returned to stores with the lifting of mobility bans. This aided top-line growth in second-quarter 2021. The company witnessed an increased demand for all products categories, including thirst, hunger, and the occasional treat, which aided growth across all segments.

The Proximity Division benefited from continued strong demand for some categories, which gained momentum amid the lockdowns — including pantry and spirits. The momentum continued in the Health Division, while the Fuel Division ("OXXO Gas") reported improved trends despite lower vehicle mobility in Mexico. The Logistics and Distribution unit witnessed a strong performance, even though the recovery in Latin America remains slow-paced compared with the United States. Revenues for Coca-Cola FEMSA remained strong, driven by a strong performance across markets. Revenues advanced 17.1%, 17.6% and 56.3% for FEMSA Comercio’s Proximity, Health and Fuel divisions, respectively, in the second quarter. Total revenues for Coca-Cola FEMSA improved 10.6% year over year.

FEMSA reported strong margins in the second quarter, thanks to improved business trends and higher operating leverage across segments. Margins were also aided by tight expense control and efficiency across operations.

The company continues to focus on offering customers more options to make contactless purchases by intensifying digital and technology-driven initiatives across operations. The company’s Coca-Cola FEMSA is leading the way with its omni-channel business, while FEMSA Comercio is progressing with the adoption of digital initiatives. Within its OXXO store chains, the company is on track with investing in digital offerings, loyalty programs and fintech platforms to evolve stronger after the pandemic and over the long term. It is also benefiting from its growth via acquisition strategy.

Few Headwinds to Counter

Despite the strong results, FEMSA reported net majority earnings per ADS of 43 cents (Ps. 86 cents per FEMSA unit) in second-quarter 2021, missing the Zacks Consensus Estimate. The lower-than-expected earnings per ADS can be attributed to uneven trends across markets despite strong top-line growth and improved margins.

Though the improvement was not linear across markets or segments; the company seems to be well-positioned compared with the prior-year quarter in all its units and also better than second-quarter 2019 in some units.