FEMSA (FMX), formally known as Fomento Economico Mexicano, S.A.B. de C.V., reported third quarter 2010 net income from continuing operations of MXN 5,057 million ($394.7 million). The quarter’s net income increased an impressive 35.1% from the year-ago quarter.
Total revenue grew 4.3% year over year to MXN 42,782 million ($3,338.8 million). The growth was primarily driven by a 15.2% growth in FEMSA Comercio, which generated MXN 16,219 million ($1,265.8 million) in revenues, mainly attributable to the opening of 1,017 stores in the last one year coupled with a 4.4% increase in same-store sales.
Overall revenue was hurt by a 1.3% decline in the Coca-Cola FEMSA segment, which posted revenues of MXN 25,675 million ($2,003.7 million) and a modest 0.1% volume increase to 616.4 million unit cases.
FEMSA’s gross profit grew 3.7% year over year, while gross margin contracted 20 basis points (bps) year over year to 42.1%. FEMSA Comercio remains the primary contributor to gross profit expansion.
Operating expenses increased 4.3% year over year to MXN12,446 million ($971.3 million) primarily due to marketing investment in the Mexico division, higher labor and freight costs in Argentina and higher labor costs in Venezuela. However, top line and gross margin growth more than offset the increase in operating expenses. Consequently, FEMSA posted a 2.5% year-over-year growth in operating income to reach MXN 5,567 million ($434 million).
At the end of the third quarter, the company had cash balance of MXN 25.842 billion ($2.047 billion), up MXN 9.883 billion ($782.7 million) year-over-year. Long-term debt (including current maturities) at the end of the quarter was MXN 22,622 million ($1,765.5 million), reflecting a capitalization ratio of 13.1%, compared with long-term debt of MXN 26,068 million and a capitalization ratio of 19.1% in the year-ago period.
Outlook
FEMSA is the largest Coca-Cola bottler in Latin America and commands a strong portfolio of well-established brands. The company is also taking initiatives to diversify its product portfolio and rapidly expand its convenience store chain, which augurs well for future operating performance.
FEMSA’s recent divestment of its brewery operations will provide management with strategic and financial flexibility to focus on core bottling and convenience store operations as well as implement organic and inorganic expansion plans. Moreover, the deal also offers the company an opportunity to reward shareholders through increased distribution of surplus cash in the form of higher dividends and share buybacks.
Hence, we maintain our long-term Outperform recommendation on the stock indicating that it would perform well above the market.
FOMENTO ECO-ADR (FMX): Free Stock Analysis Report
Zacks Investment Research
