Analyst Note| Nicholas Johnson, CFA |
With narrow-moat Coca-Cola Femsa’s shares rallying in recent months, investor conviction that had been elusive for most of the past year seemed to be gaining steam. Heading into its second-quarter earnings release, we think the focus should have been on (1) the mobility and macro outlook for key territories like Mexico and (2) Coke Femsa's ability to maintain margin amid the heightened focus on affordability spawned by the pandemic. On these fronts, we found the results (sales in line with and profits slightly ahead of our expectations) and management commentary to be encouraging. We plan to raise our fair value estimate to $69 per ADR from $67, reflecting time value as well as modestly higher profitability related to the resumption of Brazilian tax credits. Uncertainty remains in the near term with regard to currency fluctuations, consumer behavior, and the ultimate contours of the economic recovery across Latin America. Nevertheless, we believe the current margin of safety in the stock encapsulates this uncertainty and then some, making it an attractive entry point for patient investors.