Digital And Capacity Advancements Will Transform Brazil And Mexico

Key Takeaways

• Expansion of digital platforms and strategic investments are likely to enhance customer engagement, boosting revenue and earnings in Brazil and Mexico.
  
• Cost-saving initiatives and volume growth in key markets could strengthen net margins and improve overall financial performance.
  
• Challenging macroeconomic conditions and competitive pressures in key markets threaten revenue and profitability, with regional dependence amplifying financial risks.

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.

• Coca-Cola FEMSA's expansion of its Juntos+ digital platform and sales force enabler is expected to improve sales operations and customer engagement, leading to potential revenue growth and improved earnings in Brazil and soon in Mexico.
  
• Strategic capacity investments and supply chain adjustments are anticipated to enhance customer service and cost efficiency, positively impacting net margins and overall earnings in several markets, notably Mexico and Brazil.
  
• Efficiency and cost-saving initiatives across regions, particularly focusing on procurement and supply chain, are aimed at mitigating margin pressures, which could help increase net margins and improve earnings.
  
• Volume growth in key markets such as Guatemala, Argentina, and Uruguay, coupled with favorable pricing strategies and product mix enhancements, could bolster revenue and gross profit margins going forward.
  
• The expected completion of plant expansions and protective projects, such as in Porto Alegre, is aimed at restoring full production capacity and reducing logistics costs, which should support net margin improvement in the coming quarters.

Coca-Cola FEMSA. de Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Coca-Cola FEMSA. de's revenue will grow by 7.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.3% today to 9.2% in 3 years time.
• Analysts expect earnings to reach MX$32.5 billion (and earnings per share of MX$129.64) by about April 2028, up from MX$23.9 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.8x on those 2028 earnings, up from 16.0x today. This future PE is lower than the current PE for the US Beverage industry at 25.5x.
• 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 8.25%, as per the Simply Wall St company report.

Coca-Cola FEMSA. de Future Earnings Per Share Growth

Risks

• The macroeconomic backdrop in key markets, such as Mexico and Colombia, is challenging, leading to decreased consumer confidence and volume declines, which can impact revenue negatively.
  
• Increased competitive intensity and promotional activity within the Mexican market are squeezing margins and pressuring the company's profitability, suggesting a potential negative impact on net margins.
  
• Geographic concentration risks, with reliance on Mexico and Brazil for significant portions of revenue, expose Coca-Cola FEMSA to regional economic downturns; this can lead to fluctuations in earnings if local economies weaken further.
  
• Operating margin contraction by 30 basis points is influenced by decreased operating leverage and increased operating expenses like freight and labor, indicating a potential strain on profit margins.
  
• FX volatility and the unfavorable macroeconomic environment in regions like Colombia and Mexico could result in higher financial costs and exchange rate losses, thereby negatively affecting net earnings.

Valuation

• The analysts have a consensus price target of $110.831 for Coca-Cola FEMSA. 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 $195.0, and the most bearish reporting a price target of just $94.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be MX$351.7 billion, earnings will come to MX$32.5 billion, and it would be trading on a PE ratio of 17.8x, assuming you use a discount rate of 8.2%.
  
• Given the current share price of $93.1, the analyst price target of $110.83 is 16.0% 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.