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Coca-Cola Femsa a Buy on Valuation

GuruFocus.com
·3 min read

- By Holmes Osborne, CFA

Coca-Cola Femsa SAB de CV (NYSE:KOF) is way undervalued. Sales are only slightly off due to Covid and the dividend yield is outrageous. The stock is a screaming buy.

The stock trades for $45.12 and the market cap is $9.35 billion. Earnings per share were $2.41 and the price-earnings ratio is 18.44. The dividend is $2.34 and the dividend yield is a whopping 5.26%. That's a great valuation compared to the overpriced U.S. market.


Top-line sales growth has been nice. Sales grew from 177 billion pesos ($8.8 billion) in 2016 to 194.5 billion in 2019. Last year, free cash flow was 20.5 billion pesos. That's a lot of cash to pay dividends and support debt, so it is a very profitable company.

The balance sheet is bullet-proof. There is 58 billion pesos in cash and 9 billion pesos in receivables. This is to 100 billion pesos in debt. Cash is high because a small division was sold in Panama.

The company manufactures Coke, Monster, Poweraid, Ciel (sparkling water), Lechita (milk) and several juices. Approximately 47% of sales come from Mexico, 28% from Brazil, 9.6% from Colombia, 9.5% from Central America, 3.9% from Argentina and 1% from Uruguay.

Coca-Cola Femsa issued a $705 million "green" bond in the last quarter to address "environmental targets in areas such as climate action, water stewardship, and a circular economy."

Coca-Cola Co. (NYSE:KO) owns 27.8% of the company, Femsa owns 47.2%, and the Gates Foundation holds 11%. There is an annoying voting class share as well. That means the common holder receives less voting shares. As you can see, the company is tightly controlled by the three major holders.

In the most recent quarter, total revenues were only down 4%. I find that pretty impressive given the restaurant shutdown with Covid. I've had the opportunity to travel to four Latin American countries during the Covid pandemic: Brazil, Colombia, Ecuador and the Dominican Republican. I'm a big fan of Coke Zero, which is carried at most restaurants in Latin America. Ironically, it's carried at few restaurants in the U.S.

According to Morningstar, "Our $60 fair value estimate is unchanged, and we still view the shares as egregiously undervalued." I agree. Morningstar also notes that markets like Brazil and Argentina can be difficult with inflation and weak currencies.

Also mentioned by Morningstar and other analysts is that Coca-Cola Amatil (ASX:CCL) of Australia was taken out at double the valuation of Femsa by Coca-Cola bottlers of Europe. Our firm had the good fortune to own Amatil. We bought the stock back in June, held for three months and made a 34% profit.

The Mexican peso has been as weak as circus lemonade. It takes 20 pesos to buy one dollar. Seven years ago, it only took 13. I think Latin America will do well if commodities take off. Latin American countries are big commodity producers.

Two years ago, I wrote about Coca-Cola Femsa on Seeking Alpha. I opined that it is a neat company, but it wasn't a good time to buy. I was correct. The stock is down quite a bit since I wrote that article.

I like Coca-Cola Femsa. We own it and I recommend you buy it. It's way undervalued, has a huge dividend and isn't going anywhere.

Disclosure: We own shares.

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This article first appeared on GuruFocus.