FEMSA's (FMX) Strategic Endeavors In Limelight: What's Ahead?

Fomento Economico Mexicano, S.A.B. de C.V. (NYSE:FMX) , alias FEMSA, is benefiting from solid portfolio and robust strategic measures including increasing store count, diversifying business portfolio and focus on core business activities to drive growth. Further, the stock is supported by a long-term earnings growth rate of 15%. Let’s find out more.

Robust Business Portfolio

FEMSA has a formidable portfolio with exposure in various industries including beverage, beer and retail. This provides it an edge over competitors. The company primarily gets exposure to the beverage industry through Coca-Cola FEMSA S.A.B. de C.V. (NYSE:KO) , which operates as the world’s largest franchise bottler for The Coca-Cola Company (NYSE:KO) products. It enjoys a notable position in the beer industry as it owns 14.76% stake in Heineken Group, parent company of Heineken NV (OTC:HEINY) , 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 business units and third-party clients through its 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 buyout 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. FEMSA Comercio has considerably extended presence in the small-format retail chains in Mexico, Chile and Colombia.

Healthy Financials

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 its organic and inorganic businesses.

Hurdles

Though FEMSA is backed by strong fundamentals, the company has been displaying a negative surprise trend of late. Notably, the company has lagged earnings estimates for four consecutive quarters now, posting an average negative surprise of 19.4%. Further, sales lagged estimates for the second straight quarter in second-quarter 2017.

FEMSA has been facing difficult times, primarily due to currency headwinds, which has been weighing on Coca-Cola FEMSA for a while now. Further, the company has been witnessing strained margins due to growth of lower-margin businesses. We believe that persistence of these headwinds and regulatory pressure may impact future results.

Bottom Line

While the near-term hurdles cannot be ignored, the company’s strategic initiatives and solid portfolio bode well for future growth. That said, we believe the company will tide over these issues and gain momentum.

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