FEMSA's Results Are Worth Toasting (FMX)

FEMSA's Results Are Worth Toasting

By Matthew Reilly | More Articles
April 29, 2008 | Comments (0)

First-quarter results for FEMSA (NYSE: FMX ) did not disappoint. It looks to be one of the best bets in the consumer staple sector right now.

The company's bottling operations, Coca-Cola FEMSA (NYSE: KOF ) , and its beer division, FEMSA Cerveza, delivered solid top-line growth and strong margin expansion. I worried that the company's chain of convenience stores in Mexico might experience some slowdown in the quarter, but in contrast to many of its U.S. retailing counterparts, Oxxo stores experienced strong growth in revenue and units.

Overall company revenue increased more than 8% year over year, and operating income increased almost 20%. After suffering through excuses for compressed margins in many consumer products company earnings, I was pleasantly surprised to see an improvement in the operating margin, which expanded 60 basis points.

Strength was seen across all three of the company's main operations. FEMSA Cerveza had a startling 36% increase in operating income, as operating cost savings more than offset commodity cost inflation. This was a stark contrast to Mexican beer duopoly competitor Grupo Modelo; it could not handle commodity cost inflation and that hurt the first-quarter performance of part-owner Anheuser Busch (NYSE: BUD ) .

Almost as impressive was the performance of FEMSA's crown jewel, the convenience store chain, Oxxo. It makes the stock a compelling long-term holding. This quarter's results did nothing to dissuade me of that -- revenue grew 16% and operating margin expanded 60 basis points. The number of Oxxo stores increased 13% to a very impressive 5,636. Oxxo continues to redefine retailing in Mexico, and the concept has a great deal of growth still to come.

Coke FEMSA was not left out of the action. The company delivered revenue growth of 6.4% and increased operating margin 15.7%. FEMSA's broad-based growth in the quarter was quite encouraging, and I believe this bodes well for the coming year.

FEMSA's American depositary receipts represent a smart way for investors to get international exposure, specifically to growing South American economies, without taking on the risk of a company operating in a single country or a single product line. Owning a few shares might help investors' declining dollar hangovers.

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