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Coca-Cola Femsa SAB de CV ADR KOF

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Morningstar’s Analysis

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Economic Moat

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PREMIUM

Coke Femsa Reports Solid Q2; Uncertainty Abounds, but Trends Encouraging and Shares Still Cheap

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.

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Company Profile

Business Description

Coca-Cola Femsa, a subsidiary of Femsa, is the largest franchise bottler of the Coca-Cola Co. by volume. The firm primarily purchases beverage concentrates from TCCC, which it processes and packages, and then distributes the finished trademark beverages to on- and off-premises retailers. While Mexico and Brazil are Coca-Cola Femsa's most important markets, generating roughly 80% of volume, the firm operates in other Central and South American countries, including Panama, Guatemala, Uruguay, and Argentina. The equity value of the firm is divvied up between Femsa (which owns series A shares), TCCC (series D), and the public, holding 47%, 28%, and 25% economic interests, respectively. Series A and D shares control 89% of the voting rights and are not publicly listed.

Contact
Calle Mario Pani Number 100, Santa Fe Cuajimalpa
Ciudad de Mexico, DF, 05348, Mexico
T +52 5515195000
Sector Consumer Defensive
Industry Beverages - Non-Alcoholic
Most Recent Earnings Jun 30, 2021
Fiscal Year End Dec 31, 2021
Stock Type
Employees 80,000

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