EUR 850.00 For Business Accounts Only

Morningstar | Femsa Maintains a Solid Trajectory of Sales Growth in 4Q; Shares Fairly Valued

Narrow-moat Femsa ended its year on solid footing, in our view, as annual sales fell slightly short of our forecast (at MXN 470 million versus our estimate of MXN 488 million) but profitability exceeded our expectations, with gross margin of 37% (50 basis points of expansion over the prior year period) and operating margin of 9% (30 basis points of contraction) above our estimates of 36% and 8%, respectively. As such, we aren't anticipating a material change to our long-term outlook, which incorporates high-single-digit revenue growth and around 9% operating margin on average over our forecast. While we expect that adjustments for the time value of money and a more favorable exchange rate will lift our $91 per ADR fair value estimate by a mid-single-digit percentage, we'd suggest investors wait for a more attractive entry point.

Femsa's top-line trajectory remains solid, with fourth-quarter organic sales up 6% on a consolidated basis. While contributions from Coca-Cola Femsa (roughly 40% of sales) were relatively lackluster, with reported revenue declining 0.5% due to challenging macroeconomics in Argentina, we were pleased to see strong performance in the firm's remaining businesses. In the Proximity segment (36% of sales), which includes the Oxxo chain of convenience stores, organic sales grew 10%, while gross margin expanded 300 basis points to more than 43%, supported by income from financial services and more efficient promotional activity. This aligns with our view that profitability in Femsa's retail operations is poised to improve as in-store services (like financial services) continue to gain traction with consumers; we also posit that these services will enhance the value proposition of Oxxo stores.

The firm also announced that it had signed an agreement with Grupo Modelo to sell its beer brands at Oxxo stores and renegotiated its distribution agreement with Heineken Mexico. At present, Oxxo only sells brands in Heineken's Mexican beer portfolio, and this new agreement will allow the firm to gradually sell both Heineken and Modelo brands throughout the country (beginning in April, and expected to cover its Mexican territory by the end of 2022). From our vantage point, this deal evidences Femsa's attractive scale and distribution network in Mexico, which underscores our view of its competitive edge.