Adverse Latin Conditions Will Challenge Demand While Valuation Offers Upside

Key Takeaways

• Soft consumer demand, regulatory challenges, and currency volatility are pressuring revenue growth and net margin recovery despite portfolio expansion and operational efficiencies.
  
• Heavy reliance on affordability strategies and the core Coca-Cola brand may limit pricing power and resilience if consumer tastes or market conditions shift.
  
• Macro instability, changing consumer preferences, and sustained margin pressures threaten revenue growth and profitability, as the company faces competition and limited pricing power in core markets.

Catalysts

A franchise bottler, produces, markets, sells, and distributes Coca-Cola trademark beverages in Mexico, Guatemala, Nicaragua, Costa Rica, Panama, Colombia, Brazil, Argentina, and Uruguay.

• While Coca-Cola FEMSA is benefiting from long-term urbanization and modern retail expansion across Latin America-which increases points of sale and route-to-market efficiency-the company faces near-term challenges as adverse weather, softer macroeconomic conditions, and weak consumer sentiment continue to dampen volumes in key markets like Mexico and Brazil, limiting immediate revenue growth.
  
• Although rising disposable incomes and premiumization opportunities typically support margin expansion, a heavier reliance on affordability-focused strategies and intensified promotions to address current macro pressure are likely to weigh on average selling prices and could suppress net margin recovery in the coming quarters.
  
• While investments in portfolio diversification, especially into low
• and no-sugar options such as Coke Zero, position the company to align with changing consumer tastes, ongoing threats from increasing health consciousness and regulatory risks regarding sugar content and packaging may curb long-term volume growth and increase compliance costs, pressuring sustainable revenue expansion.
  
• Despite the ongoing digital transformation and ongoing improvements in operational efficiency that have driven supply chain savings and boosted service metrics, persistent FX volatility-especially in markets like Brazil and Mexico-and rising local interest rates are expected to continue eroding earnings and could result in fluctuating net income performance.
  
• While the company's long-term capital investment in capacity expansion and distribution strengthens its market reach and ability to capture future growth, execution risks remain in phasing CapEx amidst uncertain volume recovery, and the company's overdependence on the Coca-Cola brand portfolio may limit resilience if consumer preferences shift away from traditional offerings, constraining both future topline growth and net margin potential.

Coca-Cola FEMSA. de Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Coca-Cola FEMSA. de compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Coca-Cola FEMSA. de's revenue will grow by 5.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 8.2% today to 8.8% in 3 years time.
• The bearish analysts expect earnings to reach MX$29.8 billion (and earnings per share of MX$16.3) by about July 2028, up from MX$23.6 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 16.4x on those 2028 earnings, up from 14.0x today. This future PE is lower than the current PE for the US Beverage industry at 27.3x.
• 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 8.44%, as per the Simply Wall St company report.

Coca-Cola FEMSA. de Future Earnings Per Share Growth

Risks

• A sustained volume decline across core markets, chiefly Mexico and Brazil, highlights the company's vulnerability to both adverse macroeconomic conditions and unfavorable weather, suggesting potential long-term weakness in demand that could pressure future revenues and profit margins.
  
• Currency devaluation and ongoing macroeconomic instability in key Latin American economies, especially the depreciation of the Mexican peso against the U.S. dollar and higher local interest rates, have increased costs and interest expenses, posing persistent risks to net earnings and margin stability.
  
• The company's heavy reliance on core carbonated soft drink categories, particularly in Mexico, exposes it to further downside should ongoing secular trends toward healthier and still beverage alternatives accelerate, limiting revenue growth and threatening market share in high-margin products.
  
• Intense competition, particularly in the traditional trade channel at critical price points, is forcing more aggressive promotional and affordability strategies which could prolong margin compression and limit the company's ability to extract pricing power, constraining earnings growth.
  
• Persistent margin pressures from higher operating and fixed costs-including labor, maintenance, marketing, and inflationary impacts on raw materials-alongside only incremental improvements from productivity and cost-saving initiatives, may limit the company's ability to expand net margins over the long term.

Valuation

• The assumed bearish price target for Coca-Cola FEMSA. de is $97.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Coca-Cola FEMSA. de's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $195.0, and the most bearish reporting a price target of just $97.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be MX$339.3 billion, earnings will come to MX$29.8 billion, and it would be trading on a PE ratio of 16.4x, assuming you use a discount rate of 8.4%.
• Given the current share price of $83.43, the bearish analyst price target of $97.0 is 14.0% 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.