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
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.
