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FEMSA (FMX) on Crossroads: Can Strategies Counter Hurdles?

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Fomento Economico Mexicano, S.A.B. de C.V. (FMX - Free Report) , alias FEMSA, is witnessing mixed sentiments as investors are concerned about its dismal surprise history while its strategic initiatives reflect potential. The dismal top- and bottom-line performances in recent quarters have led shares of this bottler for Coca-Cola Company (KO - Free Report) to decline significantly in the last three months. This has also led to a downward trend in estimates.

The stock declined 9.3% in the last three months, wider than the industry’s fall of 4.3%. Additionally, the company has declined 7.6% since reporting dismal first-quarter 2018 results on Apr 26.



FEMSA posted lower-than-expected earnings and sales for first-quarter 2018. With this, the company reported a negative earnings surprise in six of the trailing seven quarters. Revenues lagged estimates in four of the last five quarters. The unfavorable result can be attributed to the negative foreign exchange rate as the higher U.S. dollar-denominated cash position at FEMSA was impacted by rise in Mexican peso.

Estimates Trend Down

The dismal past performances have weighed on analysts’ view for the stock, as evident from the downtrend in its earnings estimates. In the last 30 days, the company’s Zacks Consensus Estimate of 93 cents and $4.42 for the second quarter of fiscal 2018 as well as fiscal 2019 moved down by 2 cents and 5 cents, respectively. However, the company’s earnings estimate for fiscal 2018 of $4.02 per share has been stable during the same period.

Strategies Supporting FEMSA’s Growth

While the downside story looks convincing, we remain impressed with FEMSA’s focus on strategic measures, which include increasing store count, diversifying its business portfolio and focusing on core business activities. FEMSA has been taking prudent steps to diversify its product portfolio while expanding in the small-box retail segment, which bodes well for future operating performance. Moreover, the company’s focus on achieving growth via acquisitions bode well.

We believe, its drugstore operations also possess significant growth potential. Furthermore, its exposure to various industries — including beverage, beer and retail — gives FEMSA an edge over competitors. The company gets its exposure in the beverage industry through Coca-Cola FEMSA (KOF - Free Report) while the exposure to the beer industry relates to its 14.76% stake in Heineken (HEINY - Free Report) .

Bottom Line

FEMSA is oscillating between long-term positives and near-term hurdles. On that note, we would suggest holding on to the stock for the long term. Rightly, FEMSA carries a Zacks Rank #3 (Hold).

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

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