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FEMSA Stays at Neutral

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Fomento Economico Mexicano S.A.B de C.V. (FMX - Free Report) – one of the largest beverage companies operating in Latin America – remains on our Neutral list with a target price of $118.00. Moreover, the company, which also known as FEMSA, has a Zacks Rank #3 (Hold).

Why Reiterate?

We believe that the company’s strong quarterly performance and initiatives to diversify its portfolio remains its strength. On Feb 27, FEMSA reported better-than-expected fourth-quarter 2012 results primarily aided by solid revenue growth along with improved margins.

Quarterly earnings jumped 92.6% to $2.08 per share from the year-ago quarter level and surpassed the Zacks Consensus Estimate of $1.49. Total revenue grew 12.5% year over year to $4,947 million.

Going forward, we believe that the company’s divestment of Quimiproductos has provided it greater financial and strategic flexibility to pursue opportunities in its core businesses. Further, the company is taking prudent steps to diversify its product portfolio while expanding its convenience store chain, which augurs well for future operating performance.

However, stiff competition from private players and rising commodity costs compel us to be on the sidelines. Moreover, the company’s premium valuation limits the upside potential in the stock.

Given that The Coca-Cola Company’s (KO - Free Report) has a 31.6% stake in the company, Coca-Cola FEMSA derives 90% of its sales from the former’s trademark beverages.  This gives The Coca-Cola Company a significant influence over the company’s operations.  Thus, there may be a certain conflict of interest between the two companies, which may result in Coca-Cola FEMSA taking actions unfavorable to the interests of its remaining shareholders.

Other Stocks to Consider

Other stocks worth considering in the beverage industry are Coca-Cola Hellenic Bottling Company S.A. and Coca-Cola Enterprises Inc. (CCE - Free Report) , both of which hold a Zacks Rank #2 (Buy).

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