Fomento Economico Mexicano, S.A.B. de C.V.

Moat: 2.5/5

Understandability: 3/5

Balance Sheet Health: 3.5/5

Fomento Economico Mexicano, S.A.B. de C.V. (FEMSA) is a multinational beverage and retail company with its primary operations in Mexico and Latin America. It’s the largest Coca-Cola bottler in the world by volume and the second-largest by revenue.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

FEMSA is primarily a bottler of Coca-Cola products with a significant presence in the Latin American market, especially in Mexico.

Business Overview

FEMSA operates across three main business units: Coca-Cola FEMSA (KO), FEMSA’s retail division, and the Strategic Businesses unit, which is mainly involved in logistics. Each division’s contribution to the overall revenue gives an overview of the business’s diversification, and an idea of its competitive landscape, and its strengths as well as vulnerabilities.

Coca-Cola FEMSA (KO):

The core of FEMSA’s business.

This segment is the world’s largest bottler of Coca-Cola products and includes a wide range of brands like Coca-Cola, Fanta, and Sprite in addition to still water, juices, and plant-based drinks.
It has a well-established distribution network, especially in Mexico and Latin America, which is hard for competitors to replicate.
It holds a significant share in the soft drink markets in Latin America.
The focus is on strengthening its core brands, innovating new products, and maximizing value for customers.

FEMSA Retail Division:

Focused on convenience retail.

This segment operates OXXO, a large chain of small-format stores with a huge presence in Mexico and other Latin American countries.
OXXO is a convenience-store powerhouse, offering day-to-day consumer goods to capture daily purchases.
They are focused on expanding locations, providing convenience and new offerings to customers.
It’s also involved in other retail operations, such as drug stores.

Strategic Businesses Unit:

Involved in several businesses including logistics.

This division includes the company’s logistics operations.
The goal of this division is to complement FEMSA’s core business with solutions relating to supply chain, distribution and the like.
This segment has also seen some growth in the last few years.

Financial Analysis

The most recent financial reports show a stable but evolving business. FEMSA’s revenue has increased by 8.9% and 6.6% in the 2021 and 2022 respectively, highlighting its operational progress and positive trends in its revenue generation. However, the company has experienced some fluctuations across quarters.

Revenues:

The increase in total revenue has been mainly fueled by organic growth.
Mexico continues to be their main market, but South America is also seeing improvements with rising volumes.
The company expects strong performances in all business units as we progress into 2023.

Profitability:

The company has high-margin businesses.

Operating profit margins have shown resilience.
The company is seeing improved cost efficiencies.
They expect further improvement in operating margins in the next few years.

Cash Flow:

FEMSA is a robust cash generator, with significant improvements in cash generation reported recently.
Cash balances, though, have come down as a result of acquisitions and share repurchases.
They expect to have a strong balance sheet with significant cash generation.

Debt and Leverage:

They have made efforts to deleverage and are below the desired financial leverage of 2X.
The focus is on maintaining investment-grade ratings.

Recent Concerns/Controversies and Management View:

FEMSA acknowledged that rising inflation in the local economy is a cause of concern. They had to make efforts to offset inflationary effects by increasing prices, and by carefully managing costs.
Despite a challenging environment, the company is focused on long-term sustainable revenue growth, and improved profitability.
- They focus on strengthening their core brands, innovating, and improving operational efficiencies.
In Mexico, FEMSA is seeing strong consumption while anticipating an impending recession and they are focused on achieving operational efficiencies.
They have been implementing a focused strategy to drive shareholder value.
FEMSA is seeing some slowdown in some markets like Brazil, which is having an effect on volumes, and has seen currency headwinds as well.
They are focused on improving productivity at store level, as well as in warehouses to improve profitability.
They remain optimistic about their future prospects.
The company’s guidance for growth is expected to be between high single digits and low double digits, which has an effect on price.

Moat Rating: 2.5 / 5

While FEMSA has some moats, they are narrow. It doesn’t have a strong moat as the competitive landscape is very intense.

Brand Strength: While Coca-Cola is a powerful brand, FEMSA is its bottler and doesn’t own the brand itself. A strong brand, which has loyal customers, provides them with pricing power, enabling the firm to generate a premium price with strong and repeat sales and profits.
Distribution Network: FEMSA has an extensive distribution network that allows them to reach a wide range of clients.
- This moat is relatively solid and provides a certain level of protection, it doesn’t stop entrants from getting into the market.
Scale: The company has scale in its main operations which, by itself doesn’t provide any solid competitive advantage.
- Large scale allows FEMSA to produce efficiently, which will allow them to have a relative advantage when it comes to pricing, but it’s replicable.

Risks to the Moat

Rising inflation and currency fluctuations: These factors, if not managed well, could negatively impact margins and revenues.
Competition: The beverage market, as well as convenience retail, is very competitive and changes are very frequent, so new products from competition can capture market share from them.
New Entrants: Although the company has good penetration, it still has the risk of new entrants who can develop a better, more efficient value chain.
Economic Downturns: Global and local economic downturns can affect consumer spending, therefore affecting sales.
Regulatory changes: Changes in tax law or other regulations can alter the company’s operations, margins, and revenue.

Business Resilience

The company has shown resilience during turbulent periods, especially during the COVID pandemic and is showing positive trends.
It has a good mix of brands as well as channels (convenience store chain, etc), which have different characteristics and therefore provide resilience to some downturns.
They have also shown ability to innovate to keep up with changing consumer preferences.

Understandability: 3 / 5

While FEMSA’s operations are relatively clear, analyzing its complex financial structure with various operations and its exposure to different geographies adds some complexity and requires more in-depth understanding. It’s a well-established business, but it’s operations are still quite complex, making it above the easy-to-understand segment.

Balance Sheet Health: 3.5 / 5

The company has been making good progress in deleveraging and remains below their financial goal of a 2X Debt to EBITDA Ratio.
They have decent liquidity.
They also have some currency risk and a big debt pile, which brings some concerns.
While all of these things are happening, the company is still a cash-generating machine.

Conclusion

FEMSA is an interesting business, with leading brands in the Latin American region, an expansive distribution network, and a high-margin business that is relatively resilient. However, the highly competitive environment and increasing prices still do pose some risk to its moat. The company has great potential for growth, and has shown good financial performance, but some concerns still remain.