Report
Sonia Vora
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Morningstar | We think Coca-Cola Femsa's brand strength should help it endure near-term cost pressures.

Coca-Cola Femsa is the largest franchise bottler by volume of Coca-Cola, with operations in Mexico, Central America, South America, and the Philippines. We believe the firm benefits from Coca-Cola’s substantial brand equity and the vast distribution network of parent company Femsa, which have allowed it to generate returns on invested capital averaging in the low double digits over the past decade, above our 9% cost of capital estimate. While we think the firm’s exposure to macroeconomic uncertainty in these regions has led to fluctuating results in recent years, we expect that high per capita soft drink consumption (which we estimate to be above 640 8-ounce servings, among the highest globally) where Coca-Cola has a leading market share, new product offerings, and the pricing power afforded by Coca-Cola’s brand assets should help Coca-Cola Femsa generate continued economic profits over the next decade.Coca-Cola Femsa represents about 13% of Coca-Cola’s global volume, and its bottler agreements for carbonated soft drinks rely on incidence-based pricing, which we think aligns incentives between the two firms. We expect this dynamic to persist over the long term and think Latin America will be a key driver of Coca-Cola’s concentrate sales, given soft demand for carbonated soft drinks in developed markets, with sales to bottlers in the region growing at a high-single-digit clip over the next decade, by our estimates.We believe Coca-Cola Femsa will be able to leverage product and packaging innovation to increase average revenue per case at a low-single-digit rate over the long run, contributing roughly half of the mid-single-digit revenue growth we forecast after 2018. This pricing power should also allow the firm to pass through the bulk of potential raw material cost inflation for key inputs like sweetener and PET packaging, allowing its bottom line to stay intact. Still, given that Coca-Cola ultimately sets concentrate prices (40% of cost of goods sold), we think it will capture the majority of upside in gross profit, rather than allowing it to flow through to its bottling partner.
Underlying
Coca-Cola Femsa SAB de CV (ADR)

Provider
Morningstar
Morningstar

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.

Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.

We have operations in 27 countries.

Analysts
Sonia Vora

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