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FEMSA's (FMX) Penn Jersey Deal to Expand Distribution Presence

Fomento Economico Mexicano, S.A.B. de C.V. FMX, alias FEMSA, has again taken a leap to expand its specialized distribution business in the United States. Envoy Solutions, which is FEMSA’s specialized distribution subsidiary in the United States, has entered a deal to acquire the Philadelphia, PA-based Penn Jersey Paper Co. for an undisclosed amount.

The acquisition of Penn Jersey will bolster FEMSA’s distribution presence in the East Coast, including the Philadelphia metro area and New York City. Penn Jersey generated annual revenues of more than $200 million as of June 2021. FEMSA expects to seal the deal in third-quarter 2021 after the customary closing conditions are satisfied.

The acquisition is part of the company’s objective to build a leading national distribution platform in the United States. Its venture in the specialized distribution industry relates to its plan of investing in adjacent businesses, which can leverage capabilities across different markets, providing an opportunity for attractive growth and risk-adjusted returns.

With the presence of its OXXO business and other retail operations, the company has become an expert in the organization and management of supply chains and distribution systems. Notably, FEMSA serves a large number of businesses and retail customers through millions of interactions in different industries.

FEMSA entered the U.S. specialized distribution industry in March 2020 through an investment in WAXIE Sanitary Supply (“WAXIE”) and North American Corporation. The latest transaction is likely to complement its investment in WAXIE and North American Corporation in March 2020. The U.S. specialized distribution industry mainly covers a wide variety of sectors, including fresh and frozen products, decoration, DIY, office supplies, furniture and stock clearance.

Since its entry, the company has significantly expanded its presence in the specialized distribution business through various acquisitions. In August 2021, it agreed to acquire Maryland-based Daycon Products Co., which will fortify its presence on the East Coast of the United States, including Washington DC and the states of Virginia, West Virginia, Maryland, Delaware, New Jersey and Pennsylvania. The transaction is expected to be concluded in third-quarter 2021.

In December 2020, the company announced the acquisition of two independent specialized distribution businesses — Spartanburg, SC-based Southeastern Paper Group, Inc. and Wichita, KS-based Southwest Paper Company, Inc. The companies generated annual revenues of nearly $380 million as of September 2020.

FEMSA has been benefiting from its growth via acquisition strategy. FEMSA Comercio’s recent agreement with SMU, S.A. to acquire the latter’s OK Market store chain is likely to help FEMSA bolster its market footprint in Chile. OK Market is a renowned small-format store chain in Chile, with its operations spread in more than 120 locations. Its earlier acquisitions of a minority stake in Jetro Restaurant Depot, AGV, and a 40% stake in Grupo Socofar as well as the joint venture with Raízen reveal its commitment to invest in the expansion of core businesses.

Shares of the Zacks Rank #3 (Hold) company have gained 11.8% year to date compared with the industry’s 7.5% growth. The stock’s momentum can be attributed to improved consumption patterns and strong business momentum, resulting from the easing of restrictions across most markets. This aided sales and margins in second-quarter 2021.

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Sales growth was driven by the recovery in consumption as consumers returned to stores with the lifting of mobility bans. Strong sales growth across all business units also contributed to growth. Net consolidated income improved significantly from the year-ago quarter, driven by robust income from operations across all units and increased participation in Heineken’s results. The company’s digital initiatives and business expansion endeavors have been on track.

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The Coca-Cola Company KO has an expected long-term earnings growth rate of 8.7%. It currently has a Zacks Rank #2 (Buy).

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