FEMSA's 4Q Beats Estimate
Driven by robust segmental performance, Fomento Economico Mexicano S.A. (FMX) – also known as FEMSA – reported better-than-expected fourth-quarter 2012 result. This largest franchise bottler for Coca-Cola Company (KO) posted net majority income of $2.08 (Ps. 2.70) per share, beating the Zacks Consensus Estimate of $1.51. Moreover, quarterly earnings of this Zacks Rank #3 (Hold) company jumped nearly 92.6% from the year-ago quarters’ earnings of $1.08 per share.
Quarter in Detail
Total revenue grew 11.8% year over year to Ps. 63.436 billion ($4.899 billion), mainly aided by improvements in revenue at Coca-Cola FEMSA and FEMSA Comercio. On an organic basis, total revenue climbed 9.0% from the prior-year comparable period. Moreover, it also surpasses the Zacks Consensus Estimate of $3.994 billion.
FEMSA’s gross profit increased 14.8% year over year to Ps. 28.029 billion ($2.165 billion), and gross margin expanded 120 basis points (bps) to 44.2%. The increase was primarily driven by gross profit improvements at Coca-Cola FEMSA segment.
FEMSA’s operating income surged 24.9% to Ps. 9.735 billion ($0.752 billion) from Ps. 7.794 billion ($0.572 billion) in the year-ago period. On an organic basis operating income jumped 22.4% year over year. Driven by margin expansions at the company’s Coca-Cola FEMSA segment, consolidated operating margin expanded 160 bps to 15.3%.
Segmental Discussion
Total revenue at Coca-cola FEMSA soared 10.4% to Ps. 39.860 billion ($3.078 billion) in the quarter, primarily driven by a double-digit revenue growth in Mexico & Central America division along with the benefits from the acquisitions of Grupo CIMSA and Grupo Fomento Queretano in Mexico. Excluding these acquisitions, total revenue escalated 6.0%.
The segment’s operating income for the quarter surged 29.5% to Ps. 7.224 billion ($0.558billion) from the year-ago quarter, primarily driven by robust performances across both the divisions along with acquisition benefits. Consequently, Coca-Cola FEMSA’s operating margin improved 260 bps to 18.1%. Excluding the recent acquisitions impact, operating income was 26.0% higher than the previous-year quarter.
FEMSA Comercio registered a revenue growth of 15.6% to Ps. 22.671 million ($1.751 billion), mainly due to the opening of 434 net new stores in the quarter along with a 7.5% upside in same-store sales. The growth in same-store sales was primarily driven by an increase of 4.8% in average customer ticket and a rise of 2.5% in customer traffic. The company opened 1,040 net new stores in 2012 bringing the total store counts to 10,601.
Operating income, for the quarter under review, jumped 17.0% year over year to Ps. 2.406 billion ($0.186 billion). Segment’s operating margin expanded 10 bps to 10.6%, primarily due to improved gross margin, partially offset by increased expenses due to store openings, increased expenses on organizational and IT structure and developing specialized distribution channels.
Financial Position
At the end of 2012, the company had cash and cash equivalents of Ps. 38.116 billion ($2.940 billion). Long-term debt at the end of the fiscal reached Ps. 27.574 billion ($2.127 billion). During the fiscal, FEMSA made a capital expenditure of Ps. 15.560 billion ($1.182 billion), mainly towards incremental investments at Coca-Cola FEMSA.
Recent Development
In an effort to enhance its convenience store chain business, the company’s retail subsidiary – FEMSA Comercio – is on the verge of acquiring a 75% stake in a leading drugstore operator in Southeast Mexico, Farmacias YZA. We believe that the company’s foray into the drugstore business strategically fits its store chain business, which will be accretive to its top and bottom lines in the long term.
Other Stocks to Consider
Apart from FEMSA, other stocks in the Beverages-Brewers industry worth considering includeCoca-Cola Hellenic Bottling Company S.A. (CCH) and Coca-Cola Enterprises Inc. (CCE). Both the companies hold a Zacks Rank #2 (Buy).
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