KOF - Coca-Cola FEMSA: More Upside Likely As Shares Hover Near Multi-Year Highs

2023-03-24 16:21:32 ET

Summary

• Equities in the Consumer Staples sector have produced alpha against the S&P 500 in March.
• While many of the areas' stocks sport high valuations, Coca-Cola FEMSA has low earnings multiples and impressive growth potential.
• The technicals are also bullish, and I outline key price levels to monitor.

March has been a risk-off environment from a cyclical standpoint. Consider that secular growth areas like Technology (and tech-related firms in the Communication Services and Consumer Discretionary sectors) have outperformed. So too have Staples stocks while cyclical value areas such as Financials, Materials, and Energy have been soft.

A major winner within Consumer Staples has been Coca-Cola FEMSA, and it still trades at a reasonable valuation with impressive relative strength .

Growth & Safety Outpacing the S&P 500 In March

According to Bank of America Global Research, Coca-Cola FEMSA (KOF) is the largest bottler for The Coca-Cola Company (KO) outside the US, with total sales volumes of around 4bn unit cases, serving more than 375mn people. It manufactures and distributes Coca-Cola products in Argentina, Brazil, Colombia, Costa Rica, Guatemala, Mexico, Nicaragua, Panama, and Venezuela. KOF is controlled by FEMSA and KO, according to a shareholders' agreement.

The Mexico-based $16.2 billion market cap Beverages industry company within the Consumer Staples sector trades at a near-market trailing 12-month GAAP price-to-earnings ratio of 17.0 and pays a 3.6% dividend yield, according to The Wall Street Journal.

Back in February, the company reported Q4 EBITDA growth of 12%, in line with what BofA was forecasting. Strength was seen in its South America sales which offset modest weakness in Mexico and Central America. In all, YoY sales were up 15% YoY as strength in the firm's ability to maintain pricing power, driving volume growth, has sustained itself. A key risk though is some margin contraction in Mexico and Central America, so that bears watching. Another possible threat to earnings is adverse FX price moves in major South American currencies.

On valuation , analysts at BofA see earnings continuing to grow at an impressive rate in 2023 at +10%. Next year's per-share profits are expected to jump 15% with similar growth in 2025. Earnings for the US ADR shares should rise at a commensurate pace. The forward earnings multiples, even after the share price rally, are about 10% below their 5-year averages while the forward PEG is attractive at just 1.1, according to Seeking Alpha. If we assign its normal P/E, then shares should be in the mid-$80s.

Keen in my eye is KOF's rising dividend yield and ample free cash flow while its EV/EBITDA ratio is far below the S&P 500's average.

KOF: Earnings, Valuation, Dividend Yield Forecasts

Looking ahead, corporate event data provided by Wall Street Horizon shows an unconfirmed Q1 2023 earnings date of Thursday, April 27. Before that, KOF's annual shareholder meeting is scheduled for Monday, March 27, in the afternoon, so there could be some volatility around that event.

Corporate Event Risk Calendar

The Technical Take

With a solid valuation and robust EPS growth seen, the chart is also impressive. Notice in the graph below that shares are near multi-year highs as the broad market ranges about 20% below its 2022 peak. That's hefty relative strength, and I see next resistance in the low $90s for KOF while support comes into play in the mid-$60s - the early 2020 peak and mid-2022 rebound high.

Also, the rising 200-day moving average comes enters the picture at that same level. With a volume spike in Q4 2022 during a rally, that further helps confirm the bullish technical thesis.

KOF: Strong Uptrend In Place

The Bottom Line

I see more upside to KOF based on both valuations and technicals. I look forward to revisiting this one as the year progresses. For now, the mid-$80s looks like fair value.

For further details see: