Fizzy Profits
In the vast landscape of investment opportunities, the international beverage industry stands out for its unique combination of stability and growth potential.
We present a nuanced analysis of one of this market’s leaders, equipping investors with the knowledge needed to make well-informed decisions, and highlighting the key attributes of a solid and refreshing investment in a constantly evolving market landscape.
Last Week’s Portfolio Movers
❖ Super Micro Computer (SMCI) has seen its price targets upgraded by a slate of analysts after its shares surged almost 15% over the week due to continued investor optimism regarding the company’s role in the AI revolution. SMCI has gained more than 200% since we purchased it three months ago.
❖ Arista Networks (ANET) reported blockbuster revenue and earnings, strongly exceeding analysts’ expectations. The stock has been included in Citi’s “High Conviction List” and Needham’s “Best in Breed”.
❖ ITT, Inc. (ITT) shares touched a fresh record high in the past week after the industrial company reported earnings in line with estimates and higher-than-expected revenues.
❖ Applied Industrial Technologies (AIT) stock also touched its record high last week, as analysts continued to raise their price targets and the company lifted its dividend.
❖ Cigna (CI) shares jumped in the past week as the health services company significantly increased its dividend following blockbuster quarterly results.
❖ CDW Corp. (CDW) also clocked in a strong performance over the past week, after the IT solutions company beat analyst earnings estimates and increased its share repurchase program.
Portfolio Earnings and Dividend Calendar
❖ The Q4 2023 earnings season for Smart Investor Portfolio companies is beginning to wind down, with only Applied Materials (AMAT) and Stellantis (STLA) scheduled to report in the next few days.
❖ The ex-dividend date for Applied Materials (AMAT) is February 21st.
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Weekly Portfolio Trades
Today, we are performing three changes to the Smart Investor Portfolio: we are adding a formidable player in the non-alcoholic beverages industry, Coca-Cola FEMSA, and selling EnerSys and Wesco International.
New Buy: Coca Cola FEMSA S.A.B. de C.V. (KOF)
Coca-Cola FEMSA S.A.B. de C.V., also known as Coca-Cola FEMSA or KOF, is a Mexican multinational beverage company headquartered in Mexico City, Mexico. KOF is a franchise bottler that produces, markets, sells, and distributes Coca-Cola trademark beverages, as well as waters, dairy drinks, beers, and other beverages sold under different trademark names.
KOF is a subsidiary of FEMSA (FMX) which owns 53.7% of its stock, with 31.6% held by wholly owned subsidiaries of The Coca-Cola Company (KO) and the remaining 14.7% listed publicly on the Mexican Stock Exchange (since 1993) and the NYSE (since 1998).
High-Quality Business, Strong Competitive Position
The company was founded in 1991 and is headquartered in Mexico City. With a market capitalization of $22.44 billion and annual revenues of $13.5 billion, it is one of the 20 largest firms in Latin America and the largest beverage company in the region.
KOF is the largest franchise bottler of Coca-Cola trademark beverages worldwide by sales volume, with a market reach extending to over 266 million consumers in Latin America. KOF accounts for about 12% of Coca-Cola’s total worldwide sales volume.
The company has operations in Mexico, Guatemala, Nicaragua, Costa Rica, Panama, Columbia, Brazil, Argentina, and Uruguay. The largest markets are Mexico and Brazil, which make up some 75% of total revenues. These are enormous, underserved, fast-growing markets with significant business expansion opportunities. Notably, sweetened beverage demand in these markets, as opposed to the U.S. market, is not expected to be impacted by weight-loss medications in the next several years, due to the drugs’ low availability and high price.
KOF is the exclusive bottler of Coca-Cola in all of its end markets, with its status secured by long-term agreements with the Coca-Cola Company. As one of the key shareholders, the Coca-Cola Company is expected to renew these contracts indefinitely on mutually satisfactory terms.
Adding to its wide economic moat, KOF enjoys a very strong competitive position in the region, with little competition posed by local beverage companies or local Pepsi bottlers. In addition, Coca-Cola FEMSA’s business is profitable in all economic conditions, as beverage consumption is fairly resilient to downturns.
Strong Fundamentals and Earnings Growth
Coca-Cola FEMSA boasts robust financial health with a low net debt-to-equity ratio as the company has been reducing its leverage in the past five years. KOF’s debt is well-covered by operating cash flow, while interest payments are covered by EBIT many times over. The company’s debt is highly rated by leading global credit rating agencies: “A-“ at S&P Global Ratings, “A2” at Moody’s, and “A” at Fitch Ratings.
The company’s capital efficiency metrics – Return on Equity, Return on Assets, and Return on Invested Capital – are much higher than the averages for its peers in the Non-Alcoholic Beverages industry. KOF also stands out due to its very strong profitability metrics, with its gross (45.9%), EBITDA (17.1%), operating (13.1%), and net (8.6%) profit margins also strongly surpassing the averages for its industry.
In the past three years, KOF’s revenues have increased at a CAGR of 9%, while its earnings-per-share surged at a CAGR of 32.7%. The company last released its quarterly results on October 25, reporting a strong beat on earnings as a result of continued revenue growth, driven by increased sales volumes. In fact, KOF has surpassed analysts’ EPS outlook in 11 out of the 12 most recent quarters.
KOF is scheduled to report Q4 and full-year 2023 on February 22, 2024; analysts expect it to reflect the continued revenue and EPS growth trend registered over the last few quarters. The company is investing in business infrastructure expansion, with a targeted 15% increase in production capacity and a 30% increase in its warehouse capacity over the next three years. As demand continues to rise and scheduled capacity increases support faster growth, analysts expect KOF’s EPS to grow by 12% in 2024.
Shareholder Returns: Stock Performance and Dividends
Coca-Cola FEMSA’s stock took off at the beginning of 2023 on the back of strong financial results and rising growth prospects. It reached an all-time high on February 2, 2024, but gave back some gains due to profit-taking. KOF returned 36% in the past 12 months and 115% in the past three years.
Stock price appreciation is not the only allure for KOF’s shareholders, as the company has paid regular semi-annual dividends since 2009, raising them consistently since 2018. KOF’s current dividend yield is 3.01%, higher than the sector average of 2.1%. Given the company’s moderate payout ratio of 52% and considerable cash generation capability, the dividend is expected to increase further.
Despite the recent run-up in KOF’s stock, its valuation remains more than reasonable. The stock is trading at a discount to the Consumer Staples sector and at the lower end of the valuation range for its peers in the industry. In addition, based on projected cash flows, the stock is trading ~20% lower than its fair value.
TipRanks-scored top Wall Street analysts see an average upside of 17.6% for the stock over the next 12 months. KOF carries a TipRanks Smart Score rating of “Perfect 10” with a “Strong Buy” recommendation:
Conclusion
Coca-Cola FEMSA’s S.A.B. de C.V. is a well-managed company with a wide economic moat, a strong competitive position, and great growth prospects, supported by its strong finances. Thus, we view KOF as a rare mix of quality, growth, and shareholder-friendly attributes, selling at a very attractive valuation. As such, we believe it can be a valuable addition to the Smart Investor portfolio.
New Sell 1: EnerSys (ENS)
EnerSys is a global leader in stored energy solutions for industrial applications, specifically as a producer of industrial batteries. The company manufactures and distributes energy system solutions and motive power batteries, specialty batteries, battery chargers, power equipment, battery accessories, and outdoor equipment enclosure solutions to customers worldwide.
On February 7, the company reported its results for fiscal Q3 2024 (ended on December 31, 2023). For the quarter, ENS delivered a strong EPS beat, reporting gross and operating margin expansion. However, revenue disappointed, with net sales down year-over-year, driven lower by spending declines in telecom and broadband end markets. Moreover, EnerSys produced a downbeat EPS guidance for the current quarter, penciling in lower earnings-per-share than was expected by analysts.
As a result of the pessimistic guidance, the company’s stock has lost over 10% since it was published. While EnerSys remains a financially healthy company with a strong liquidity position and industry-beating metrics on capital efficiency and profitability metrics, it is now going through a difficult patch as pronounced end-market demand slowdown is impacting multiple business segments. We may reassess the company later on, but for the time being, we believe it is appropriate to sell the stock.
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New Sell 2: Wesco International (WCC)
Wesco International is a provider of electrical, industrial, communications, maintenance, repair and operating, and original equipment manufacturer products, as well as construction materials and advanced supply chain management/logistic services.
Wesco reported its Q4 2023 results on February 13, featuring a very disappointing EPS outcome. After the company’s stellar Q3 report, expectations were high, with the stock running up to its all-time high in anticipation of the continued earnings growth trend. However, Q4 revenue and earnings missed estimates by a wide margin, while 2024 guidance envisions almost flat sales for the year.
WCC stock dropped on these results, which ignited a string of analysts’ price-target downgrades. We believe that the weak sales outlook provides a solid reason to sell the stock.
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Portfolio Stocks Under Review
In this section, we will flag stocks that may be let go from the portfolio.
General Dynamics (GD): The aerospace and defense company remains under review for potential sale with low urgency as the stock is overvalued. This increases its vulnerability to a pullback on any negative news, given that GD is a low-growth dividend stock.
Electronic Arts (EA): The videogames producer beat on EPS in the last quarter but missed estimates for net quarterly bookings. EA’s key product “Apex” experienced weak results, which offset gains for the EA Sports division. U.S. video game spending rose by just 1% year-on-year in 2023, while overall competition stiffened with several blockbuster releases from other game developers. EA’s 2024 growth prospects depend on the market rebounding as well as on the success of its new titles. The company is placed under review for potential sale with low urgency.
Charter Members of the 30% Winners Club
*The 30% Winners Club includes stocks from the Smart Investor Portfolio that have risen at least 30% since their purchase dates.
Our exclusive club has lost one member, Wesco International, but gained five others: Taiwan Semiconductor, Molina Healthcare, Ulta Beauty, Applied Materials, and Stellantis.
As a result, the Winners’ ranks now include 12 stocks: SMCI, GE, AVGO, ANET, CDW, ORCL, TSM, MOH, AMAT, ULTA, STLA, and GD.
The next in line to enter the Winners’ ranks are still Check Point (CHKP) and Parker Hannifin (PH), which rose 28.9% and 28.6%, respectively, since their purchase dates. Will one of them be able to close the gap, or will someone else outrun them to the finish line?
What’s Next?
Our next commentary will come out on Wednesday, February 21st, before the market opens.
Until then – we wish you a world of investment success!
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Disclaimer
The information contained in this article represents the views and opinions of the writer only, and not the views or opinions of TipRanks or its affiliates and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy, or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices, or performance.
