Saturday, May 6, 2017

A current AIM Fund holding: Fomento Económico Mexicano ADR (FMX) by Michael Dennison "Gearing up for Cinco de Mayo? FEMSA is ready."

Fomento Económico Mexicano ADR (FMX, $88.54): “All is sound at Fomento”
By: Michael Dennison, 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.

Fomento Económico Mexicano (NYSE: FMX) operates in the food & beverage industry. The company produces, distributes and markets its beverages across a wide range of products including juices, coffees, teas, and milk products. The company also has a right to produce and sell trademarked Coca-Cola beverages, a job that gives it the title of the world’s largest Coca-Cola bottler in the world. FMX was founded in 1890 and is currently located in Monterrey, Mexico.

• FMX saw total revenue jump 28.2% in 2016, its largest increase in the past five years.

• FMX will release its Q1 earnings this afternoon.

Key points: FMX splits itself into four primary segments. Coca-Cola FEMSA, FEMSA Comercio Retail, FEMSA Comercio Health and FEMSA Comercio Fuel. Total revenues increased in all four divisions with fuel leading the way at 54.6% YoY Growth.

Coca-Cola FEMSA saw revenue increases of 16.6% over 2015. The company did however notice adverse effects due currency fluctuations as well as increases in sugar prices, a primary component the company’s COGS. Gross profit rose 10.65% during the year.

FEMSA Comercio Retail witnessed YoY revenue growth of 14.4% in 2016 combined with a 7% increase in same store sales. The company sees this directly as a result of opening 1,164 new OXXOs, their flagship convenience store. The division saw an increase in gross profit of roughly 16%.

FEMSA Comercio Health enjoyed healthy revenue growth of 24% over 2015 with same-store sales growth of 22.4%. FMX attributes a large portion of the growth in its health division to better than expected economic conditions in South America.

FEMSA Comercio Fuel takes the cake for 2016, reporting a 54.6% increase in revenue over 2015. Same-station revenue growth was up 7.6% over 2015 due to an increase in volume-per-fill-up and a slight rise in the price of oil.

What has the stock done lately?
Since releasing its 4Q16 results FMX has seen its share price steadily rise. The company is also seeing gains from recent good news and upgrades over at Heineken, FMX has a 20% stake in the world’s most global brewer. On Wednesday the world’s largest coke bottler released a pre-earnings statement highlighting their Q1 net income for the division. 

FMX says that its Coca-Cola division’s net income increased 146% during the quarter to $314 million. Revenue for the division saw a 40% increase while the net income was boosted by favorable currency fluctuations in the Brazilian real and Colombian peso against the Mexican peso. 

FMX has sited dubious conditions related to the outlook for NAFTA, and any possible policy shifts from the Trump Administration as sources of concern. The company forecasted a rise CapEx this year in case of any adverse conditions.  At the company’s annual shareholders meeting, shareholders voted to allow a $0.03 per share dividend as well as a roughly $400,000 share repurchase program. FMX stock is up 16% YTD.

Past Year Performance: FMX is down 3.39% over the last 52 weeks yet only sees that as a blip after reporting a fantastic FY 2016. The stock is trading at a midpoint between its 52 week high and low of $100.57 – $73.45.

 Source: FactSet

My Takeaway
Improving economic trends and more favorable Trump Administration policies should be great news for FMX. On Wednesday night the White House revealed that President Trump, on a call with his Canadian and Mexican counterparts, surprised everyone and backed off on his “withdraw from NAFTA” platform, now just promising smaller tweaks. As Heineken and Coca-Cola sales continue to rise FMX should benefit from having strategic partnerships with these two brands. All in all the state of FMX is sound and I would expect a further price increase in the stock throughout FY 2017.

Source: FactSet

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