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Will Higher Expenses Weigh on FEMSA's (FMX) Q3 Earnings?

Zacks Equity Research
FEMSA's (FMX) dismal surprise history and soft margins can be attributed to higher raw material costs. However, its growth initiatives are encouraging.

Fomento Economico Mexicano, S.A.B. de C.V. FMX or FEMSA is slated to report third-quarter 2018 results on Oct 26.

The company has a dismal surprise trend, with an earnings miss in six of the trailing eight quarters. However, it has delivered an average positive earnings surprise of 36.3% in the last four quarters. Meanwhile, revenues lagged estimates in four of the preceding six quarters.

The Zacks Consensus Estimate for the third quarter is pegged at $1.02, reflecting a year-over-year plunge of 79.6%. Notably, estimates have been stable over the past 30 days. Additionally, consensus mark for revenues is $6.16 billion, down 4.2% from the year-ago quarter number.

The question lingering in investors’ minds is, whether or not FEMSA will be able to deliver a positive earnings surprise in the quarter to be reported.

Factors Likely to Impact the Quarter

Apart from a dismal surprise history, FEMSA has been witnessing soft margins due to higher raw material costs in certain markets that are hurting its Coca-Cola FEMSA division. In the last reported quarter, soft operating margins at Coca-Cola FEMSA and FEMSA Comercio’s Retail division dented the company’s consolidated operating margin. At Coca-Cola, operating margin was hurt by non-cash operating foreign exchange loss in Mexico, incremental costs related to acquisitions and higher sweetener costs in the Philippines. Operating margin contraction at FEMSA Comercio’s Retail division can be attributed to higher operating expenses due to initiatives to strengthen compensation for in-store personnel, higher transportation costs and accelerated store openings.

Additionally, FEMSA’s bottling business is likely to be affected by rising aluminum costs owing to tariffs imposed by the Trump administration. These issues are likely to remain major concerns in the upcoming quarter as well.

Despite these aforementioned headwinds, FEMSA’s strategic efforts to expand the store base, diversify the business portfolio and focus on the core business activities are encouraging. Also, the company’s efforts to achieve growth via acquisitions is commendable. In order to strengthen its retail portfolio, FEMSA acquired Big John — a grocery store, in Santiago, Chile. Moreover, FEMSA has been diversifying its retail chain format operations by acquiring businesses across Latin America.

FEMSA’s venture into the drugstore business also strategically fits its chain store business and will be accretive to both its top and bottom lines in the future. The company’s exposure in various industries, including beverage, beer and retail, gives it an edge over competitors.

What the Zacks Model Unveils

Our proven model does not conclusively show that FEMSA is likely to beat estimates this quarter. This is because a stock needs to have both — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Although FEMSA’s Zacks Rank #3 increases the predictive power of earnings beat, its Earnings ESP of 0.00% makes surprise prediction difficult in the upcoming release.

Stocks With Favorable Combination

Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat:

Archer Daniels Midland Company ADM has an Earnings ESP of +3.85% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Newell Brands Inc. NWL has an Earnings ESP of +5.00% and a Zacks Rank of 3.

Monster Beverage Corporation MNST has an Earnings ESP of +1.37% and a Zacks Rank #3.

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Newell Brands Inc. (NWL) : Free Stock Analysis Report
 
Monster Beverage Corporation (MNST) : Free Stock Analysis Report
 
Fomento Economico Mexicano S.A.B. de C.V. (FMX) : Free Stock Analysis Report
 
Archer Daniels Midland Company (ADM) : Free Stock Analysis Report
 
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