Will Soft Margins Hinder FEMSA's (FMX) Earnings in Q4?
Fomento Economico Mexicano, S.A.B. de C.V. FMX or FEMSA is slated to release fourth-quarter 2017 results on Feb 27, after the market closes. The question lingering in investors’ minds is whether this major beverage company will be able to deliver a positive earnings surprise in the quarter to be reported.
Last quarter, the company pulled off a positive earnings surprise of 293.7%. However, it has missed the Zacks Consensus Estimate in the preceding three quarters. Nonetheless, the company has recorded an average positive earnings surprise of 61.9% for the trailing four quarters. Let’s see how things are shaping up prior to this announcement.
Fomento Economico Mexicano S.A.B. de C.V. Price and EPS Surprise
Fomento Economico Mexicano S.A.B. de C.V. Price and EPS Surprise | Fomento Economico Mexicano S.A.B. de C.V. Quote
What to Expect?
The Zacks Consensus Estimate for fourth-quarter earnings is pegged at $1.08, reflecting year-over-year improvement of over 20%. We note that earnings estimate for the quarter has been stable in the last 30 days. Additionally, analysts polled by Zacks expect revenues of $6.55 billion, representing growth of 18.2% from the year-ago quarter.
Factors at Play
FEMSA remains plagued with soft margins for over a year due to strained margins at Coca-Cola FEMSA and lower-margin businesses growth at FEMSA Comercio. Consequently, impacting the company’s gross and operating margins in the preceding quarter as well. Additionally, margins were hurt by increased freight and labor expenses, consolidation of Coca-Cola FEMSA’s results in the Philippines and margin contraction at FEMSA Comercio’s Retail division.
The company predicts operating margin to remain strained due to lower margins at FEMSA Comercio’s Retail division. It anticipates operating margin for the segment to decline slightly compared with the previous forecast of flat margins.
Additionally, the company remains cautious about the rest of 2017 as well as 2018 due to bearish consumer sentiment and increased fuel prices, thanks to the high inflation rates. FEMSA also lowered sales outlook for fourth-quarter 2017 and 2018, after three years of robust growth. Apart from the high inflation, other factors that hurt the outlook are Mexico's 2018 presidential election and continuing talks to modernize the North American Free Trade Agreement (NAFTA), a keystone of Mexico's economy.
Consequently, shares of FEMSA have declined 6.3% in the past six months compared with the industry’s loss of 3.2%.
While these factors pose a threat to the company’s upcoming performance, FEMSA is well poised for long-term growth through its strategic actions including expansion of store base, diversification of business portfolio and focus on core business activities.
What the Zacks Model Unveils
Our proven model does not show that FEMSA is likely to beat earnings 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.
FEMSA has an Earnings ESP of +18.52%, which increases the predictive power of ESP. However, the company’s Zacks Rank #4 (Sell) makes surprise prediction difficult.
As it is we caution against sell-rated stocks (Zacks Rank #4 or 5) which should never be considered going into an earnings announcement.
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:
Hormel Foods Corporation HRL has an Earnings ESP of +10.94% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.
Pinnacle Foods, Inc. PF has an Earnings ESP of +1.98% and a Zacks Rank of 3.
Inter Parfums, Inc. IPAR has an Earnings ESP of +0.88% and a Zacks Rank #3.
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Fomento Economico Mexicano S.A.B. de C.V. (FMX) : Free Stock Analysis Report
Inter Parfums, Inc. (IPAR) : Free Stock Analysis Report
Hormel Foods Corporation (HRL) : Free Stock Analysis Report
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