Digital Ecosystem Expansion And US Acquisitions Will Strengthen Future Market Position

Key Takeaways

• Expanding data analytics and strategic digital platforms are set to drive revenue growth and customer loyalty while optimizing margins.
  
• Significant capital returns and disciplined U.S. expansion are expected to enhance market position and optimize earnings per share.
  
• Weaker consumer environment and integration challenges in Mexico and U.S. threaten FEMSA's revenue growth and profitability amidst economic and geopolitical uncertainties.

Catalysts

Through its subsidiaries, operates as a bottler of Coca-Cola trademark beverages.

• The ongoing expansion and improvement of data analytics, segmentation, and revenue management at OXXO and the ability to cater these capabilities to international markets are expected to enhance revenue growth and margin improvement.
  
• Significant capital return plans, including substantial ordinary and extraordinary dividends and share buybacks, aim to optimize the balance sheet and enhance earnings per share.
  
• The strategic focus on expanding the digital ecosystem, particularly the Spin platform, is anticipated to drive future revenue and customer loyalty as financial and payment services are further integrated.
  
• The multiyear investment cycle across FEMSA's core business units aims to boost long-term revenue and earnings by scaling operations and leveraging existing efficiencies.
  
• The disciplined approach to U.S. market expansion through organic growth and selective bolt-on acquisitions is likely to enhance revenue and market position without compromising returns.

Fomento Económico Mexicano. de Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Fomento Económico Mexicano. de's revenue will grow by 9.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.1% today to 4.2% in 3 years time.
• Analysts expect earnings to reach MX$40.9 billion (and earnings per share of MX$10.53) by about March 2028, up from MX$31.0 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting MX$48.3 billion in earnings, and the most bearish expecting MX$33.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 29.4x on those 2028 earnings, up from 21.9x today. This future PE is greater than the current PE for the US Beverage industry at 17.3x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.74%, as per the Simply Wall St company report.

Fomento Económico Mexicano. de Future Earnings Per Share Growth

Risks

• There is a notable mention of traffic contraction at OXXO stores due to a weaker consumer environment, which could pose challenges for the company in generating consistent revenue growth in their core Mexican market.
  
• The company is still far from reaching its target leverage ratio of 2x net debt-to-EBITDA, which could impact its ability to efficiently manage capital returns and investments, potentially affecting future earnings stability.
  
• Economic uncertainties, such as macroeconomic headwinds and a softer consumer environment in Mexico, may affect FEMSA's net margins and profitability moving forward.
  
• The operational and financial integration challenges with the newly acquired convenience store businesses in the U.S. and the exploration of various experiments and rebranding efforts can impact future revenues if they do not yield the expected benefits.
  
• Risks associated with external factors such as geopolitical perspectives, changes in currency dynamics, and the impact of weather conditions could negatively affect the financial performance, particularly the net margins and revenue growth.

Valuation

• The analysts have a consensus price target of MX$235.2 for Fomento Económico Mexicano. 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$305.0, and the most bearish reporting a price target of just MX$208.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be MX$982.5 billion, earnings will come to MX$40.9 billion, and it would be trading on a PE ratio of 29.4x, assuming you use a discount rate of 13.7%.
• Given the current share price of MX$195.22, the analyst price target of MX$235.2 is 17.0% higher.
• 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.