Wednesday, December 14, 2016

An AIM Intl holding: Fomento Economico Mexicano SAB de CV ADR (FMX) by Dominic Delia. "Wait it out - the Trump election isn't as bad for this stock as it seems"


Fomento Economico Mexicano SAB de CV ADR (FMX, $95.21): “The Glass is Half Full for this Beverage Company”
By: Dominic Delia, AIM Student at Marquette University

Image result for fomento economico mexicano logo

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 Summary
Fomento Economico Mexicano SAB de CV ADR (NYSE:FMX) is a vertically integrated, international producer, distributor, and marketer of Coco Cola branded beverages headquartered in Monterrey, Mexico. The company also operates a chain of convenient stores and gas stations under the OXXO brand name and drugstores through the recent acquisition of Socofar.

• Over the past year, FMX has seen rapid growth in its Oxxo initiative, which accounts for approximately 50% of revenues and is projected to grow ~15% through 2020. Don't overestimate the potential negative impact of a Trump administration on this stock.

• The company was able to capture the upside during recent Mexican and South American economic growth, and is poised to protect on the downside through their non-discretionary sales mix.

• FMX should be able to continue their Oxxo expansion at ~1200 stores per year, outpacing competitors such as Walmex and Soriana, while also expanding EBITDA margins at a 15% CAGR.

• FMX should be able to expand their drugstore presence into the largely untapped South American market while also leveraging its Oxxo distribution network and expertise in this field to expand both top and bottom line growth.

Key points: FMX’s stock price has appreciated 4.28% since it was added to the AIM International Portfolio this past April. The company beat on earnings this past week with an upside surprise of 14.6% ($0.97 Actual vs $0.85 Consensus). 

FMX is poised to capitalize on rapid growth within its Ozzo, drugstore, and gas station segments as they look to expand into untapped areas of Latin America. The company’s product mix is heavily weighted towards non-cyclical sales, thus insulating the firm from the impending Mexican economic slowdown. Margin growth opportunities within the Oxxo segment include increasing economies of scale, alongside prepared food initiatives, which have helped contribute to the impressive EBITDA/store growth (doubled over the last decade).

When Q3 earnings were announced in late October, revenues grew almost 40% YoY (27.4% from Q2 2016), same store sales increased 5.7%, and organic drug store revenues increased 10.7% without taking into account the recent acquisition.

Looking forward to 2017, FMX will need to continue their expansion into largely untapped geographic areas while further developing brand equity and driving down SG&A expenses. The company’s gas station segment will benefit from the energy price rebound in Q3 and will look to edge higher in light of recent OPEC supply negotiations.

What has the stock done lately?
Over the past quarter, Fomento Economica has been hurt by a crackdown on Mexico’s telecommunications industry, which allowed AT&T to enter Carlos Slim’s market. Ozzo stores generate much of their customer traffic from the sale of prepaid phone cards, and with the emergence of more cost effective post-pay plans, visits per store dropped for the first time in two years.

Despite this however, Oxxo stores saw a 5% increase in sales per customer, which helped to offset the drop in customer volume. The drugstore segment saw revenues skyrocket upon the successful integration of the Socofar, which should drive much of firm’s growth through 2017.  

The fuel division also saw double digit growth as the company focused on rebranding and implementing price increases. The Coca Cola FEMSA segment of the business saw profitability tumble in South America due to poor consumer conditions alongside rising sugar costs, while the opposite held true in Mexico, as solid economic conditions spurred quality top line growth.

Past Year Performance: Over the past twelve months, Fomento Economico has dropped ~7%, while overcoming a 15% drawdown in 1Q16 after a huge earnings miss for 4Q15. During 2016, the company has focused on integrating its recent acquisition of Socofar drug stores while growing the number of stores it operates across Mexico and South America. Oxxo’s resilient performance (Sales/Customer), in spite of the recent headwinds stemming from the deterioration of Carlos Slim’s stronghold on the telecom industry, has provided shareholders with a much needed bright spot.


Source: FactSet

Post Election Performance: Over the past month since the Trump election, this Mexican stock has suffered. Once the dust settles in 2017, this stock should return to the $90 to $100 range it traded pre-election.
Source: Yahoo!Finance

My Takeaway

With recent acquisitions looking more accretive by the day, FMX is on the path to becoming a major conglomerate in Latin America. Despite being a Consumer Staple, the growth story here is evident and provides a much-needed balance within this historically defensive area of the AIM International Portfolio. Management adeptly positioned the company to take full advantage of Mexican economic growth in 1H16, while using its small-box store expertise to effectively grow its Ozzo and Drugstore business segments.  

Over the past month since the Trump election, this Mexican stock has suffered. Once the dust settles in 2017, this stock should return to the $90 to $100 range it traded pre-election.I recommend the fund add to its position in FMX while patiently waiting for the Oxxo and drugstore expansions to propel this firm to the forefront of the Latin American convenience store market.

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