Digital Expansion With TUALI B2B And Coca-Cola Zero Sugar Will Improve Customer Engagement

Key Takeaways

• Strategic investments in logistics and digital initiatives aim to enhance supply chain efficiency, market execution, and revenue growth.
  
• Focus on pricing strategies and product innovation supports sustainable revenue increases and margin optimization in key markets.
  
• Economic instability in Argentina and Ecuador, along with South American decline, and U.S. market pressures, pose risks to revenue and margins despite growth efforts.

Catalysts

Produces, distributes, and sells soft drinks in Mexico, Peru, the United States, Argentina, and Ecuador.

• Arca Continental's investments in production, distribution, and logistics capabilities, such as adding new production lines and opening distribution centers, are expected to reduce shortages and improve supply chain efficiency, driving future revenue growth and enhancing net margins.
  
• The expansion and sophistication of Arca Continental's digital initiatives, including the TUALI B2B platform and advanced digital tools, are set to improve market execution, customer engagement, and operational efficiencies, positively impacting revenue and earnings growth.
  
• The strategic focus on price-pack architecture, pricing management, and promotional activities, particularly in the U.S. market, are anticipated to optimize revenue growth and enhance EBITDA margins by driving more sales through higher-margin SKUs.
  
• Arca Continental's continued expansion of its beverage operations in key markets like Peru and Mexico, supported by innovation in product offerings and targeted investments in consumer trends such as Coca-Cola Zero Sugar, is expected to sustain volume growth and revenue expansion.
  
• The company's disciplined capital allocation towards strategic CapEx investments in production capacity and supply chain enhancements is aimed at supporting long-term revenue growth, improving operational scalability, and increasing return on invested capital (ROIC).

Arca Continental. de Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Arca Continental. de's revenue will grow by 7.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.2% today to 9.1% in 3 years time.
• Analysts expect earnings to reach MX$27.2 billion (and earnings per share of MX$15.96) by about April 2028, up from MX$19.6 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as MX$23.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.2x on those 2028 earnings, up from 19.1x today. This future PE is greater than the current PE for the MX Beverage industry at 18.6x.
• Analysts expect the number of shares outstanding to decline by 0.07% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.72%, as per the Simply Wall St company report.

Arca Continental. de Future Earnings Per Share Growth

Risks

• Economic challenges in key regions like Argentina and Ecuador could continue to affect overall consumption and impact revenues, as these countries face economic and political instability.
  
• Declining volume in South America, particularly with challenges in Argentina, poses a risk to revenue growth, as these declines can offset gains in other regions.
  
• The competitive landscape in the U.S. market, despite its strong performance, could pressure margins and long-term revenue growth if price increases face resistance.
  
• Continued reliance on raw material hedging and favorable exchange rates suggests vulnerability to cost pressures and currency fluctuations, which could impact net margins if conditions change unfavorably.
  
• The significant capital expenditure plans, although aimed at supporting growth, could pressure cash flows and returns on investment if the projected revenue and EBITDA growth do not materialize as expected.

Valuation

• The analysts have a consensus price target of MX$232.694 for Arca Continental. de based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of MX$265.0, and the most bearish reporting a price target of just MX$193.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be MX$298.5 billion, earnings will come to MX$27.2 billion, and it would be trading on a PE ratio of 21.2x, assuming you use a discount rate of 13.7%.
• Given the current share price of MX$220.22, the analyst price target of MX$232.69 is 5.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.