Top Picks 2017: Fomento Economico Mexicano

01/26/2017 6:00 am EST

Focus: STOCKS

Peter Staas

Managing Editor, Capitalist Times and Energy & Income Advisor

The selloff in Mexican equities – reflecting uncertainty about Trump's trade policies -- gives patient, long-term investors an opportunity to ease into positions in high quality names, suggests Peter Staas, editor of Capitalist Times.

Our Top Pick for aggressive investors, Fomento Economico Mexicano ADR (FMX), trades with ample liquidity and stands to benefit from its retail segment’s long runway of growth opportunities.

The company generates about half of its annual operating revenue from its 48 percent interest in Coca-Cola FEMSA (KOF), which bottles and distributes a wide range of branded beverages in Mexico, Central America, South America and the Philippines.

FMX continues to plow the free cash flow generated by its interest in Coca-Cola FEMSA into the three retail segments that account for the remaining 50 percent of its operating revenue: convenience stores, drugstores and gasoline stations.

At the end of 2015, Fomento Economico Mexicano operated more than 14,000 OXXO-branded convenience stores in Mexico, rolling out new locations at an aggressive pace of about 1,200 sites each year.

This impressive growth rate and appealing product offerings have made OXXO the second-largest retailer in Mexico; it also boasts some of the best profit margins and same-store sales growth among its global peers.

The company also continues to roll out non-traditional stores in hospitals, factories and shopping malls and has also moved into Chile and Colombia via acquisitions, providing new platforms for growth.

More recently, Fomento Economico Mexicano has moved into drugstores, bringing its location count to more than 1,000 locations through four acquisitions.

FMX has a strong enough balance sheet to support management’s expansion plans. But it could also unlock additional value by monetizing its 20 percent equity interest in Heineken (HEINY) and using the proceeds for acquisitions that complement its existing platform and add scale.

Given the headline risks to Mexican equities, prospective investors should consider easing into this position. FMX rates a buy up to $80 per share for patient investors who have a longer time horizon.

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