by Jon Markman | January 3, 2013 1:30 pm
Editor’s note: This column is part of our “Best Stocks for 2013” series; stay tuned for more entrants today and tomorrow.
A 20% return for Hershey (NYSE:HSY) in 2012 wasn’t bad … but let’s see if we can improve upon it this year.
In keeping with my preference for emerging markets and consumer staples, and managements with a brain and a long time at the wheel, I bring you Fomento Economico Mexicano (NYSE:FMX). That’s a mouthful, which is why it is commonly known by a combination of its initials (not quite an acronym): Femsa.
I like a steady company like this because I suspect 2013 could be a bit rocky for the U.S. as we start to get the hang of the whole austerity thing — higher taxes, less government spending and all of that. In this kind of environment, you need something special to grow, and I think Mexico has one of the greatest potential growth profiles in the world. It has a very solid government, well-managed budget, a fantastic skilled workforce, and lots of natural resources.
In the middle of all this growing wealth and stability is Femsa, a global beverage conglomerate based in Monterrey, Mexico. And if you happen to have $170 billion in your pocket, you could probably drive down there and buy the whole shebang. It owns a 54% stake in Coca-Cola Femsa (NYSE:KOF), the largest Coke bottler in Latin America, as well as a 20% ownership stake in Dutch brewer Heineken.
But Femsa is not just Coke South or Heineken West. It also owns the Oxxo chain of convenience stores, consisting of more than 9,500 units across Mexico and Colombia. The stores are Mexico’s largest convenience store chain, and analysts expect another 3,000 stores over the next couple of years.
Femsa’s scope is impressive, with over 177,000 employees, more than 160 beverage brands, 9,300 distribution routes, and a couple of hundred soft drink and store distribution facilities. All this equates to nearly $16 billion in annual revenues across nine Latin American nations.
At the height of its beer operations, Femsa was the second largest brewer in Mexico, producing brands including Tecate, Sol, Dos Equis and Indio. But in a bold and aggressive move in 2010, Femsa put its entire beer business up for auction in an attempt to focus on its faster-growing soft drink and convenience businesses. The auction drew a lot of attention, but Heineken had the top bid, pledging an equivalent of $7.6 billion in an all-stock deal.
The firm has continued to expand its brand and business reach, as subsidiary Coca-Cola Femsa two years ago acquired all the shares of Grupo Industrias Lacteas in Panama. This deal allows the company to enter the milk and dairy products category and further expand its non-alcoholic beverage business.
Femsa caters to more than 1.7 million retailers and 215 million consumers, and is the No. 1 beverage provider in every region that it operates in. The firm has grown revenues by 16% annually for the last 10 years.
The Oxxo convenience store division represents just over a third of total sales, and Femsa opens a new store every eight hours on average, serving close to eight million people daily. Store growth has been steady at 19% annually since 2000, and here’s a factoid for the water cooler: Oxxo is the largest store chain in the Americas, ahead of the likes of 7-Eleven and Shell.
Shares climbed a market-beating 44% in 2012 and are trading at 22x next year’s earnings, but Femsa is a growth stock by most measures, and historically trades at a premium to its slower growing peers. It has been a little too strong in recent days to recommend immediately, but on the next pullback to its 100-day average, probably around $93-$95, I will start to recommend a mix of common shares and calls.
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