Fomento Económico Mexicano, or FEMSA (NYSE:FMX), has established itself as a dominant player in Mexico and Latin America, with diversified businesses covering various essential consumer segments. To refocus on its core retail consumption business, FEMSA has recently announced divestments. In this article, we will explore the businesses that constitute FEMSA, assess their value, and discuss why the strategic shift presents an entry point for investors.
Investment Thesis
FEMSA has built an empire in Mexico and Latin America, encompassing different sectors of the economy. However, the extensive diversification has led to a lack of focus. By divesting non-core businesses, the company aims to streamline its operations and maximize profitability in its retail consumption segments.
Business Overview
FEMSA is a leading Mexican multinational company, operating across sectors such as beverage production, convenience stores, logistics, real estate, and health services. Its flagship businesses include Coca-Cola FEMSA, OXXO convenience stores, health stores, and fuel stores.
Coca-Cola FEMSA
Coca-Cola FEMSA is one of the world’s largest franchise bottlers of Coca-Cola products. While it represents a significant portion of FEMSA’s revenues, its growth has been relatively slow compared to other segments. However, it remains a stable source of income and contributes significantly to the company’s overall profitability.
OXXO Convenience Stores
OXXO is a widely recognized chain of convenience stores in Mexico and other Latin American countries. With over 21,000 stores in Mexico alone, OXXO has a strong brand presence and offers a wide range of products and services. The segment has shown consistent growth and profitability, making it a vital asset for FEMSA.
Health Stores
FEMSA operates pharmacy services locations, aiming to consolidate the fragmented health market in Mexico. While facing stiff competition, the segment has demonstrated stable revenue growth and profitability, in line with industry standards.
Fuel Stores
FEMSA operates retail gas stations that incorporate convenience stores. This segment faces challenges due to competition from established players and government-controlled fuel prices. Nonetheless, the segment has shown strong revenue growth and contributes to FEMSA’s overall financial performance.
Focusing on Core Business
FEMSA has recognized the importance of refocusing on its core businesses. By divesting non-core assets and restructuring its operations, the company aims to unlock value, optimize investments, and capitalize on its retail sales segments. This strategic shift enables FEMSA to allocate resources effectively and enhance its customer loyalty programs, such as the recent introduction of Spin, a digital wallet and debit card tied to OXXO.
Valuation
Using a sum-of-the-parts analysis, the estimated valuation of the various FEMSA segments suggests a significant undervaluation of the company compared to its current market cap. The core retail consumption segments, including OXXO and Coca-Cola FEMSA, show promising growth rates and profitability, contributing to a favorable investment thesis for FEMSA.
Final Thoughts
FEMSA’s strategic shift to refocus on its core retail consumption business presents an attractive opportunity for investors. With its strong market presence and continued growth potential, FEMSA is well-positioned to thrive in Mexico and Latin America. While risks exist, such as currency fluctuations and political challenges, FEMSA’s quality business model and undervaluation make it a compelling investment choice.
Editor’s Note: This article discusses securities that do not trade on major U.S. exchanges. Please be aware of the risks associated with these stocks.
