Coke Femsa Posts Solid Growth in 3rd Quarter
Shares are trading slightly below our fair value estimate, but we think investors should wait for an entry point with a more favorable risk/reward opportunity.
We think narrow-moat Coca-Cola Femsa (KOF) remains on track to meet our expectations for the year following its third-quarter results, with revenue up 16.6% (3.9% on a comparable basis), driven by pricing, compared with 20%-plus growth for the year. Although comparable sales volume declined 1.6%, largely due to weakness in the still category, we were buoyed by the smaller decline (0.7%) in comparable transactions, as this suggests that the firm’s packaging mix is shifting toward smaller pack sizes, which often carry higher margins. Further, net margin for the quarter stood at 6.4%, versus our forecast for below 6%. While our long-term thesis (which calls for high-single-digit compound revenue growth and operating margin averaging 13% over the next five years) is intact, we’re planning to revise our valuation to incorporate a stronger bottom line. We anticipate this adjustment will be more than offset by a less favorable exchange rate (MXN 19.04 per $1 as of Oct. 25), which should lead to a mid-single-digit percentage decrease in our valuation. Shares are trading slightly below our $80 per ADR fair value estimate, but we think investors should wait for an entry point with a more favorable risk/reward opportunity.
Despite weak unit case volumes, which fell 1.6% over last year, we were pleased to see consolidated gross margin remain flat, which we attribute partly to lower PET and sweetener prices in many of the firm’s regions. Still, we remain focused on some of the near-term challenges the firm faces in its core Mexico and Central America geography (which contributes nearly half of sales), including a softer consumer environment following natural disasters in the region and higher concentrate costs. As evidence, volumes for the segment contracted 3.2% and gross margin fell 70 basis points over last year. Looking ahead, we think the firm will be able to continue its pricing initiatives to help offset lower volumes (the average price per case in the region grew 6.3%).
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Sonia Vora does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.