Coca-Cola FEMSA (KOF) Outperform T. Salem
CP: US$ 32.22 TP: US$ 50 CAP: US$ 5.9b
Revisiting KOF's growth story - UPGRADING to OUTPERFORM (from Nautral)
• We are upgrading KOF to OUTPERFORM from NEUTRAL. We like KOF's valuation, its exceptionally defensive profile for
2009 and its opportunity to come out of the downturn stronger than it went into the volatility.
• KOF uses macro downturns possibly better than any other company in our global beverage universe for creating long-term
value. Consider (1) the experience of its strong operators to aggressively clean up weak competitors during downturns (2)
their willingness to use their strong balance sheet and cash flows to invest in new packages and marketing plans so as to
capitalize on areas of growth precisely when consumers are most actively resetting their consumption patterns and
reconsidering their beverage options and shopping patterns, (3) their ability to sustain solid returns (4) their impressive ability
to insulate the benefit of such risk taking and hard work from being confiscated by The Coca-Cola Company, as occurs to
most other Coke bottlers. At a time that valuations are difficult to ascertain, recognizing who has the best structural
advantages to outperform through turmoil is important.
• KOF uses macroeconomic meltdowns to create system value. KOF utilized the Mexican Tequila Crisis in 1994-1996 to
radically reset package mix in its favor and to cripple weaker Pepsi competitors. KOF was within the top-3 performing stocks
in Mexico through the Mexican Tequila crisis. In the 2001-2002 Argentine crisis, Coca-Cola FEMSA radically reset the
channel and package mix in its favor and became a global model for the system.
• This crisis offers new opportunities for KOF to recast its business model to the detriment of its non-carbonated competitors.
Furthermore we believe there are marginal points of market share to be taken from the Pepsi system which is again reeling,
as PBG undergoes a massive restructuring era in Mexico.
• In our view the impact on earnings during 4Q related to FX losses should already be priced into the shares and, as we have
previously mentioned we do not foresee KOF under a scenario of financial stress: we expect KOF's FCF yield for 2009 at
8.1% (ex. any debt repayments), which compares to FMX's 8.5%, Walmex's 2.4%, and Grupo Modelo's 6.3% FCF yields.
• We are maintaining our 2009 target price for KOF shares at US$50 / ADS offering a 55% upside potential from current levels