As the premier Coca-Cola bottling partner in Latin America, Coca-Cola Femsa SAB de CV (KOF, Financial) holds an enviable position in the fast-growing beverage industry across this region. With its massive production and distribution footprint, Coca-Cola Femsa is able to efficiently serve more than 270 million consumers from Mexico down to Brazil, Uruguay and Argentina. The company operates 56 strategically located manufacturing plants and 249 distribution centers to provide optimal reach into key markets.
Coca-Cola Femsa's portfolio consists of over 134 brands, led by the iconic Coca-Cola along with other major names like Sprite, Powerade and Monster Energy. By offering a diverse range of sparkling and still beverages at varied price points, the company is able to drive penetration across diverse consumer segments. Its beverages are sold through well-established networks encompassing over 2 million retail outlets, demonstrating its unrivaled scale and execution capabilities.
Brand image and ownership
As an authorized bottler, Coca-Cola Femsa produces, markets and distributes Coca-Cola brands in iconic packaging, including the signature Coca-Cola glass bottle and aluminum cans. This provides a globally recognized brand image that resonates with consumers. The company is 47.2% owned by FEMSA and 27.8% owned by The Coca-Cola Co. (KO, Financial), ensuring strong strategic alignment.
Source: 10-K Filing
Strong quarterly performance reaffirms market leadership
The second-quarter performance is quite impressive. The company's volumes, revenue and profits all showed solid growth compared to the same period last year.
For the three-month period, Coca-Cola Femsa's total volumes increased 7% to over 1 billion unit cases. This growth was broad-based, with Mexico, Brazil, Guatemala and other markets all contributing. Total revenue for the quarter rose 7.2% to 61.4 billion pesos ($3.54 billion). On an organic basis, excluding currency effects, revenue jumped nearly 17%.
Higher sales volumes along with favorable price mix drove the top-line growth. This helped push up gross profit 7.9% to 27.3 billion pesos, while operating income climbed 11.9% to 8.6 billion pesos. Ebitda also increased 7.8% compared to last year's quarter.
Coca-Cola Femsa's management was upbeat about the company's momentum going into the second half of 2023. It is expected the volume growth will continue, supported by strong consumer demand and execution. Pricing is likely to moderate, but remains aligned with inflationary trends in most markets.
Operational improvements and shareholder value
The company's margins could also improve in the coming quarters as some cost pressures ease related to raw materials and sweeteners. Coca-Cola Femsa's focus on becoming a preferred business-to-business platform is also paying off, with its Juntos+ digital ordering system seeing rapid adoption across markets.
For Coca-Cola Femsa shareholders, the company's latest results confirm its strong positioning. With volume and sales growth outpacing many beverage peers, it offers an attractive play on the resilient consumer demand for affordable branded soft drinks. Its geographic diversity, extensive distribution network and digital investments add to the long-term investment case.
Proactive hedging strategies mitigate currency risks
As the company operates across Latin America, it has significant exposure to the U.S. dollar, which impacts its raw material costs, debt obligations and investments. However, the company utilizes financial instruments to hedge against foreign exchange risk and minimize volatility.
Specifically, Coca-Cola Femsa hedges about 80% of its U.S. dollar requirements for 2023 in Mexico using forwards and other derivatives. The company takes a more cautious approach to hedging 2024 exposures, slowly building up positions. In Brazil, Colombia and Uruguay, it has hedged close to 50% of its 2023 U.S. dollar requirements.
The company's hedging strategy focuses on a 12-month rolling period for both currency and commodity exposures related to costs of goods sold. This measured approach provides near-term protection while allowing flexibility to respond to changing market conditions.
These proactive hedging practices have helped Coca-Cola Femsa successfully navigate the macroeconomic challenges and currency fluctuations inherent across Latin America. While foreign exchange volatility poses a risk, the company's use of financial instruments provides stability and predictability. By hedging a large portion of its dollar-denominated costs and obligations, Coca-Cola Femsa can focus its efforts on operational execution despite external foreign exchange movements. The company's disciplined but adaptive hedging strategies have been an important factor in allowing it to effectively manage its currency risk and deliver consistent financial performance.
Reliable dividend growth
Coca-Cola Femsa's consistent dividend growth makes it an attractive option for income-focused investors. The company has paid increasing dividends annually since 2003. This steady dividend growth has been supported by rising operating income over time, reflecting the sustainability of its payouts.
Dividend growth and valuation
In 2003, Coca-Cola Femsa's dividend was 2.82 pesos per share. This climbed to 58 pesos per share in 2022, representing an impressive 16.3% compounded annual growth rate. Using a conservative dividend growth model, we estimate Coca-Cola Femsa's intrinsic value to be around $153 per share, representing 89% upside from the current trading price. This valuation assumes 12% dividend growth for the next five years, followed by 1% annual growth in perpetuity and a 10% discount rate.
Source: Author's table
Appeal for income-focused investors
Given its strong brands, market leadership and predictable cash generation, Coca-Cola Femsa seems positioned to continue delivering dividend increases going forward. For investors focused on recurring income, the company's track record of steady payout growth makes it an appealing investment option in the beverage space.
Key takeaway
Coca-Cola Femsa represents an attractive long-term investment opportunity, especially for investors seeking exposure to the growing Latin American consumer market. With its unrivalled scale, geographic footprint, portfolio of iconic brands and strong financial profile, the company is well-positioned to continue its robust growth trajectory. While foreign exchange fluctuations and macroeconomic instability in the region bring some risk, the company has demonstrated savvy management of these challenges.
For investors with a sufficiently long time horizon, Coca-Cola Femsa offers a compelling mix of growth potential, resilience and income generation. The company's dominant competitive advantages, consistent execution and shareholder returns make it a worthwhile portfolio addition for those looking to tap into the upside of Latin America's burgeoning middle class.
