Here's Why FEMSA (FMX) Deserves A Place In Your Portfolio

Fomento Economico Mexicano, S.A.B. de C.V. (NYSE:FMX) , alias FEMSA, is a leading company with exposure in various industries including beverage, beer and retail, which gives it an edge over competitors. The company’s performance has been good driven by strategic measures such as increasing store count, diversifying business portfolio and focusing on core business activities to drive growth.

The cumulative effect of the aforementioned factors is quite visible in FEMSA’s stock performance, which has outperformed the broader industry in the last three months. Shares of this Mexico-based soft drinks bottler have increased 7.3%, while the Zacks categorized Beverages – Soft Drinks industry registered a 4% growth. Moreover, the stock has significantly outpaced the Zacks categorized Consumer Staples sector’s growth of 0.8%. That said, let’s find out what’s aiding the solid stock performance.

Robust Business Portfolio

FEMSA primarily gets its 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 the second largest stake in 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 its business units and third-party clients through its FEMSA Strategic Businesses subsidiary.

Strategic Initiatives

FEMSA has been taking prudent steps to diversify product portfolio while expanding its small-box retail segment, which bodes well for future operating performance. To date, FEMSA Comercio has considerably extended footprint in the small-format retail chains in Mexico, Chile and Colombia.

Additionally, the company has been focusing on expanding drugstore operations, seeking to capitalize on the growing drugstore business. Notably, it remains on track with its 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.

As of Mar 31, 2017, the company had a total of 2,136 point of sales across all regions, of which 16 net new stores were added in the first quarter. We believe FEMSA’s venture into the drugstore business is strategically in sync with its chain store business, and will be accretive to both top line and bottom line in the long term.

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

However, the company has lagged earnings estimates for three straight quarters now. 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 company remains well positioned to grow on the basis of its strategic initiatives and solid portfolio, the near-term hurdles cannot be ignored. However, we believe these issues are short-lived and the company will tide over these.

Aptly, FEMSA carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

More Stock News: 8 Companies Verge on Apple-Like Run

Did you miss Apple (NASDAQ:AAPL)'s 9X stock explosion after they launched their iPhone in 2007? Now 2017 looks to be a pivotal year to get in on another emerging technology expected to rock the market. Demand could soar from almost nothing to $42 billion by 2025. Reports suggest it could save 10 million lives per decade which could in turn save $200 billion in U.S. healthcare costs.

A bonus Zacks Special Report names this breakthrough and the 8 best stocks to exploit it. Like Apple in 2007, these companies are already strong and coiling for potential mega-gains. Click to see them right now >>