Fomento Economico Mexicano SAB (ADR) (NYSE:FMX) Holds Fast-Growth Legacy Businesses

May 23, 2016

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Fomento Economico Mexicano SAB

Eric Chenoweth, Co-Portfolio Manager at Scout Investments, says Fomento Economico Mexicano SAB (ADR) (NYSE:FMX), or Grupo FEMSA, holds fast-growing legacy businesses that will benefit the company in the future.

Grupo FEMSA in Mexico has been in and out of our top 10 over the last year. It plays well into what we talk about as far as having high-return growth. It’s a company that is known for its position in Coke FEMSA (NYSE:KOF), which is a Coke distributor throughout Mexico and a lot of Latin America, and also the Philippines. And they own about half of that company, about 48% of Coke FEMSA.

They also own about 20% of Heineken (OTCMKTS:HINKY), which is a legacy position that they’ve mentioned that, at some point, they’d like to exit. So the company has some legacy businesses you don’t think of as fast growth. Heineken is probably growing low to mid single digits. Coke FEMSA is still growing mid to high single digits. However, FEMSA has been investing heavily in some high-return growth businesses that make up over a third of the overall group value in our estimate.

Eric Chenoweth
Eric Chenoweth

Chenoweth says OXXO is also a Grupo FEMSA business that is growing very rapidly, as it continues to build out approximately 1,200 convenience stores each year.

Same-store sales have been growing between 3% and 9% as stores mature, and OXXO’s value proposition improves. OXXO has added more SKUs that get replenished more frequently. They’ve also added prepared foods.

Steady topline growth and margin improvement should boost cash flow 15% to 20% a year. FEMSA has learned from OXXO that there are a lot of retail formats that are underrepresented in Mexico and Latin America. Drug stores and gas stations are formats that offer FEMSA considerable growth potential in coming years. And drug stores are off to a good start. FEMSA is at the point where it should start to gain bargaining power with large drug companies.

So that will do a couple of things. It will allow them to take down prices and improve store margins. We think, whenever the Heineken stake gets liquidated someday, that will provide a lot of cash for the company to reinvest in much higher growth, higher margin businesses. Heineken’s shares are currently about a third of the value of FEMSA. So we’re excited about FEMSA.