Fomento Economico Mexicano, S.A.B. de C.V. (FMX - Free Report) , alias FEMSA, seems to be a favorable pick at the moment with a promising future. The company has been riding on solid portfolio and robust strategic measures including increasing store count, diversifying business portfolio and focusing on core business activities to drive growth.
Further, the stock is supported by a long-term earnings growth rate of 15% and a VGM Score of B, which justifies its growth prospects. These factors have aided the company to attain a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Notably, shares of FEMSA have climbed 27.2% year to date, outperforming the industry’s 14.6% growth. That said, let’s delve deeper and find what’s driving the performance lately.
FEMSA Portfolio is an Eye-Catcher
FEMSA has a formidable portfolio with exposure in various industries including beverage, beer and retail. This provides it an edge over competitors. The company mainly gets its exposure to the beverage industry through Coca-Cola FEMSA S.A.B. de C.V. (KOF - Free Report) , which operates as the world’s largest franchise bottler for The Coca-Cola Company (KO - Free Report) . In the beer industry, it enjoys a notable position as it owns the second largest stake in Heineken NV (HEINY - Free Report) , a leading brewer with operations in 70 countries.
Moreover, its 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 plastics solutions to its business units and third-party clients through FEMSA Strategic Businesses subsidiary.
FEMSA’s Health Division Holds Potential
FEMSA has been focused on expanding drugstore operations as it sees significant potential in that space. The company has been aggressively seeking to capitalize on the rapidly growing drugstore business. Further, it is on track with efforts to build infrastructure and integrate its four legacy drugstore operations into a single operating platform. These include its previously acquired Mexican drugstore business — Farmacias YZA, Farmacias FM Moderna and Farmacias Farmacón — as well as South America’s leading drugstore operator, Grupo Socofar. We believe FEMSA’s foray in to the drugstore business strategically fits its chain store business, and will be accretive to both its top and bottom line in the long term.
Diversifying Business a Key Strategy
FEMSA has been increasingly focused on diversifying products portfolio, while expanding in the small-box retail segment. To do this, FEMSA has been concentrating on achieving growth via acquisitions for a while now. A recent addition to its retail portfolio is the acquisition of grocery store chain — Big John in Santiago, Chile. This business is likely to enhance FEMSA Comercio’s convenience store operations in Chile.
Previously, the company gained presence in South America through the Grupo Socofar buyout, which not only widened exposure in the drugstore business but also brought beauty operations under its ambit. Additionally, the company has been diversifying retail chain format operations by acquiring businesses across Latin America. To date, FEMSA Comercio has considerably extended footprint in the small-format retail chains in Mexico, Chile and Colombia.
Moreover, FEMSA's strong cash flow generation capacity and a healthy balance sheet enables it to make incremental investments in business expansion. The company is effectively utilizing available funds to grow core bottling and convenience store operations as well as expand organic and inorganic businesses.
While all is well with FEMSA’s fundamentals, the company has been displaying a negative surprise trend of late. Notably, the company has lagged earnings estimates for four consecutive quarters now, delivering an average negative surprise of 19.4%. Further, sales lagged estimates for the second straight quarter in second-quarter 2017.
Though the company posted sales gain across all segments, bottom-line results were impacted by strained margins and higher operating expenses at Coca-Cola FEMSA and FEMSA Comercio’s Health division. Further, FEMSA has been facing difficult times due to currency headwinds, which has been weighing on Coca-Cola FEMSA’s results for a while now.
Nevertheless, we believe these issues are short-lived and the company will tide over these.
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