Expansion Of OXXO And Bara Stores Will Strengthen Market Position

Key Takeaways

• Expansion of OXXO stores in Mexico and optimizing Bara's value proposition is expected to drive revenue growth and market penetration.
  
• Geographic diversification, digital capabilities, and operational efficiency improvements aim to boost earnings and enhance net margins.
  
• Strategic shifts and economic challenges may impact FEMSA's revenue growth and profitability, with electoral uncertainties and operational changes posing potential risks.

Catalysts

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

• FEMSA plans to expand its OXXO store base significantly in Mexico, with a target of approximately 1,100 net new stores by 2025. This aligns with sustained growth in same-store sales and high-quality store base expansion, expected to drive revenue growth.
  
• The acquisition of Delek retail assets in the U.S. presents growth opportunities in a new market, which has the potential to boost earnings through geographic diversification and new customer acquisition.
  
• FEMSA is focused on optimizing its discount value proposition with Bara in Mexico, targeting a 40% growth rate in the store base. This expansion is expected to positively affect revenue through increased market penetration.
  
• The strategic separation of Bara from OXXO Mexico is aimed at enhancing operational efficiencies, which may lead to improved net margins as the company reduces costs and focuses resources on high-growth opportunities.
  
• FEMSA is leveraging digital capabilities, including the Spin by OXXO platform, to boost engagement and recurring revenues. Enhanced financial services and loyalty programs are expected to improve net margins and contribute to earnings growth.

Fomento Económico Mexicano. de Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Fomento Económico Mexicano. de's revenue will grow by 8.9% 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$10.45) by about December 2027, 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$32.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 33.5x on those 2027 earnings, up from 20.8x today. This future PE is greater than the current PE for the US Beverage industry at 24.8x.
• Analysts expect the number of shares outstanding to grow by 3.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.35%, as per the Simply Wall St company report.

Fomento Económico Mexicano. de Future Earnings Per Share Growth

Risks

• Same-store sales at Proximity America were flat for the quarter due to a decline in average traffic and a competitive consumer environment, potentially impacting FEMSA's revenue growth.
  
• The unfavorable weather conditions negatively affected traffic in key categories such as beer, soft drinks, and water, which could reduce net margins if such conditions persist.
  
• The Mexican consumer environment is weakening in the second half of an electoral year, adding economic uncertainty that could hinder earnings from Proximity Mexico.
  
• In certain LatAm markets like Chile and Peru, FEMSA is reducing expansion efforts to focus on profitability, which could decelerate revenue growth in those regions.
  
• The organizational segregation of Bara from OXXO Mexico introduces short-term costs and operational complexities, which could impact net margins as the company transitions and scales the business.

Valuation

• The analysts have a consensus price target of MX$240.22 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 2027, revenues will be MX$976.5 billion, earnings will come to MX$40.9 billion, and it would be trading on a PE ratio of 33.5x, assuming you use a discount rate of 13.4%.
• Given the current share price of MX$179.72, the analyst's price target of MX$240.22 is 25.2% 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.