Machine Learning And Affordable Brands Will Expand Global Retail

Key Takeaways

• Expanding affordable brands and leveraging loyalty insights are expected to drive revenue growth as consumer habits shift toward frequent, lower-priced purchases.
  
• Cost containment and staff optimization initiatives aim to sustain margins and drive operational efficiency without sacrificing growth or service quality.
  
• Economic uncertainty, intensified competition, and rising operational costs pose challenges to FEMSA's revenue growth and profitability despite expansion and transformational initiatives.

Catalysts

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

• FEMSA is focused on driving traffic and top line growth by expanding affordable brands and presentations, including in key categories like tobacco, soft drinks, and beer; they are also focusing on increasing the breadth of financial services and leveraging insights from their loyalty program, Spin Premia. This strategy is expected to boost revenue growth as consumer habits shift towards more frequent purchases of lower-priced items.
  
• The company is implementing cost containment initiatives to ensure a leaner organization without sacrificing future transformational initiatives. This effort aims to maintain net margins by reducing operational costs while still investing in growth opportunities.
  
• FEMSA is optimizing its store staff with machine learning to lower staff per store and streamline operations, allowing for improved operating margins and efficiencies without compromising customer service.
  
• There is an expectation of a better second half of the year, driven by commercial and cost initiatives, and a gradual pickup in economic activity and consumer sentiment in Mexico. This is projected to stabilize operating margins and sustain a high single-digit revenue growth for the full year.
  
• With expansion plans for new OXXOs in international markets like Brazil and converted DK stores in the U.S., FEMSA is working on value proposition adjustments, including enhanced prepared food offerings and local market adaptations, potentially increasing earnings from new segments and regions.

Fomento Económico Mexicano. de Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Fomento Económico Mexicano. de's revenue will grow by 8.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.4% today to 4.2% in 3 years time.
• Analysts expect earnings to reach MX$42.3 billion (and earnings per share of MX$11.29) by about May 2028, up from MX$27.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting MX$51.2 billion in earnings, and the most bearish expecting MX$35.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 29.6x on those 2028 earnings, up from 27.1x today. This future PE is greater than the current PE for the US Beverage industry at 18.7x.
• 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 13.72%, as per the Simply Wall St company report.

Fomento Económico Mexicano. de Future Earnings Per Share Growth

Risks

• The ongoing uncertainty around trade with the U.S. and the postponement of many investment decisions may continue to slow economic activity, impacting consumer sentiment and revenue growth.
  
• A persistently soft consumer environment in Mexico, combined with macroeconomic headwinds, could challenge revenue generation and affect FEMSA's financial performance.
  
• Increased competition from traditional trade recovering market share and smaller SKU price points may pressure OXXO's revenue and profitability.
  
• Despite gross margin expansion initiatives, rising operational costs, including a double-digit increase in minimum wage in Mexico, could reduce operating margins.
  
• The investment in transformational initiatives and continued store expansion amid a weak traffic trend might lead to reduced operating leverage and net earnings volatility.

Valuation

• The analysts have a consensus price target of MX$238.2 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$215.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be MX$1012.6 billion, earnings will come to MX$42.3 billion, and it would be trading on a PE ratio of 29.6x, assuming you use a discount rate of 13.7%.
  
• Given the current share price of MX$206.05, the analyst price target of MX$238.2 is 13.5% 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.