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Things You Need to Know Before FEMSA's (FMX) Q2 Earnings

Zacks Equity Research

Fomento Economico Mexicano, S.A.B. de C.V. FMX or FEMSA is slated to report second-quarter 2019 results on Jul 25. The company has a dismal earnings surprise trend, the average four-quarter negative earnings surprise being 16.8%.

The Zacks Consensus Estimate for the company’s second-quarter earnings is pegged at 80 cents, which suggests a 36% decline from the year-ago quarter. Further, estimates remained unchanged in the last 30 days.

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. price-eps-surprise | Fomento Economico Mexicano S.A.B. de C.V. Quote

Let’s see how things are shaping up for this announcement.

Factors Likely to Impact Q2

FEMSA has been delivering soft operating margins over the past few quarters. Declines in the margins at Coca-Cola FEMSA and FEMSA Comercio’s Health Division mainly hurt operating margin in first-quarter 2019. Notably, operating margin at the Health division was impacted by lower gross margin. Further, operating margin at Coca-Cola FEMSA was affected by higher labor and freight expenses along with restructuring indemnities. Persistence of these headwinds may continue to impact margins in the second quarter of 2019.

Additionally, the company is witnessing soft trends in the FEMSA Comercio Health Division. Gross margin decline at the division resulted from tough comparisons for its operations in South America owing to margin expansion in 2018, along with new pricing regulations in Colombia and increased promotional activity in Chile.

Apart from soft operating margin, the company is likely to be affected by rising raw material costs that have plagued the beverage industry as it is the largest franchise bottler for the Coca-Cola Company. Higher tariffs charged on steel and aluminum by the Trump administration, and retaliatory tariff plans put forward by China created more troubles for beverage companies, leading to an increase in packaging costs. The increase in prices for aluminum escalated the cost of producing cans for these beverages.

Escalating industry-wide freight costs and increase in other input costs are other headwinds, impacting the bottling system. The effects of increased costs were visible in Coca-Cola FEMSA’s operating results for the first quarter, which is likely to persist in the second quarter as well.

Nevertheless, FEMSA’s efforts to expand the store base, diversify the business portfolio and focus on the core business activities might offset some of the declines caused by the aforementioned headwinds. The company has been taking actions to diversify the product portfolio while expanding the small-box retail segment, particularly across Latin America. This should continue to boost top-line performance in the to-be-reported quarter.

What the Zacks Model Unveils

Our proven model does not conclusively predict 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.

FEMSA currently has a Zacks Rank #5 (Strong Sell) and an Earnings ESP of 0.00%. The company’s negative Rank and Earnings ESP of 0.00% make surprise prediction impossible.

We caution against stocks with a Zacks Ranks #4 (Sell) or 5 going into an earnings announcement, especially when the company is seeing a negative estimate revision.

Stocks Likely to Deliver Earnings Beat

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

Kimberly-Clark Corporation KMB currently has an Earnings ESP of +0.61% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Colgate-Palmolive Company CL has an Earnings ESP of +0.69% and a Zacks Rank #3 at present.

Altria Group, Inc. MO presently has an Earnings ESP of +0.91% and a Zacks Rank #3.

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