Coca-Cola FEMSA: Bottling Profits for Investors

At the risk of stating the obvious, I love emerging-market companies that hold a dominant share of their home markets, have successfully proven their ability to expand into new territories, and are attractively valued. One area that is rife with such investment opportunities is Latin America, and one of my favorite such plays is Mexican-based beverage giant Coca-Cola FEMSA (NYSE: KOF).

Foolishly put, Coca-Cola FEMSA -- like its national counterparts American Movil (NYSE: AMX) in telecommunications and Grupo Televisa (NYSE: TV) in media -- is well-positioned to benefit from its dominant position in its target markets, the continued positive economic and demographic trends in Latin America, and sector-leading margins. Did I happen to mention the fact that shares are attractively valued, given the company's opportunities for growth?

Let's crack open a Diet Coke and browse through Coca-Cola FEMSA's prospects, shall we?

With the $3.6 billion acquisition of Panamerican Beverages in May 2003, Coca-Cola FEMSA became the biggest Coca-Cola bottler in Latin America and the second-largest worldwide in terms of sales volume. The company -- which is 85%-owned by Coca Cola (NYSE: KO) and Mexican conglomerate FEMSA (NYSE: FMX) -- operates in nine countries throughout Latin America and delivered 1.8 billion cases of beverages in 2005, accounting for roughly 40% of total Coca-Cola sales in the region. According to Morningstar Research, this translates into a 70% share of the Mexican market and an overall Latin American market share of roughly 60%.

Now, I don't know about you folks, but this type of market leadership always attracts my attention, especially when that leadership is in markets that are rapidly growing in both demographic and economic terms. According to the Population Reference Bureau's 2005 World Population Data Sheet, the population of Latin America is expected to expand by some 44% over the next 45 years, from 559 million in 2005 to more than 805 million in 2050. To put this growth in perspective, the population of Western Europe is expected to decline by 2% over the same period. Moreover, Latin America's population is quite young, with roughly 28% of the population under the age of 24, and we all know how much youngsters like their sodas.

The outlook for economic growth is equally positive with the Economic Commission for Latin America and the Caribbean (ELAC) expecting 4.5% growth in the region in 2007, down slightly from 2006 but still quite healthy. It should be noted that some of Coca-Cola FEMSA's key markets, namely Argentina and Venezuela, are expected to grow substantially faster at rates of 7.5%+. While longer-term economic forecasts are notoriously ineffectual, suffice it to say that Mexico's finance minister recently predicted that Mexico would become a fully developed nation within 20 years.

Not a bad macroeconomic and demographic outlook, eh?

Well, the operational side doesn't look too shabby, either. In the most recent quarter ended Sept. 30, 2006,Coca-Cola FEMSA reported revenue of $1.3 billion, up 9% over last year's period, driven by a 6.5% increase in case volume. Operating income came in $214 million, up only 3.5% as increased raw material costs dented margins.

That said, Coca-Cola FEMSA boasts operating margins significantly better than the industry average. The company reported an operating margin of 16.3% in the quarter, well ahead of the 9.1% margin posted by the Pepsi Bottling Group (NYSE: PBG) during the same period, and trouncing Cott Corporation's (NYSE: COT) lowly margin of 2.5%.

This combination of a dominant position in fast-growing markets and superior operating margins is pretty intriguing, especially given the company's attractive valuation. At a recent price of $39.78 per share, Coca-Cola FEMSA is trading at roughly 14 times fiscal 2007 estimates, a 27% premium to its long-term growth rate. In comparison, competitor Pepsi Bottling trades at a 33% premium to its growth rate, while Cott's premium stands at a whopping 52% ... and both companies have much less exposure and market share in the lucrative Latin American markets.

Need I say more?

For related Foolishness:

• The Best International Stock for 2007: FEMSA
• The Best Blue Chip for 2007: PepsiCo

Coca-Cola is a Motley Fool Inside Value pick.

Fool contributor Will Frankenhoff is enjoying his time writing for the Fool more than, reading The Financial Times, rooting for the Jints, or taking a nap. He welcomes your feedback. He does not own shares in any of the companies mentioned above.