A Toast to Safe Havens

11/04/2008 10:00 am EST


John Christy

Founding Editor, Forbes International Investment Report

John H. Christy III, editor of Forbes International Investment Report, says a Mexican beverage company offers safety and growth.

Beverages, particularly the alcoholic variety, are one of the classic defensive sectors that investors often turn to as a safe haven in times of market turbulence. But in the current meltdown, panic-stricken selling across the board has made it possible to find high-quality, defensive stocks trading at bargain valuations.

A prime example is Fomento Economico Mexicana SAB de CV, or FEMSA (NYSE: FMX). Based in Monterey, Mexico, FEMSA is Latin America’s largest beverage company, with revenue of $13.5 billion in 2007. Today, FEMSA’s beverage portfolio includes 75 varieties of soft drinks and 20 different kinds of beer. FEMSA also owns a chain of 5,800 convenience stores in Mexico that operate under the OXXO name.

While beer is FEMSA’s oldest business, it accounts for only about a quarter of total revenue. Convenience stores contribute another 28% of revenue, but the biggest business of all is soft drinks.

FEMSA is Coca-Cola’s Latin American partner and the second-largest Coke bottler in the world. FEMSA owns 53.7% of Coca-Cola FEMSA (NYSE: KOF), Coke owns 31.6%, and the remainder of the shares are in public hands. Thanks in large part to the Coke relationship, FEMSA’s reach extends beyond its home market throughout Latin America. The company’s brands reach 214 million people in nine countries.

FEMSA’s beer brands, which include Dos Equis and Tecate, have also been gaining significant traction in the US. In 2004, FEMSA signed a marketing partnership deal with Heineken USA that lets FEMSA’s brands tap into Heineken’s powerful US marketing and distribution machine.

The US beer market has been flat in recent years, with volume growth of just 1% in the first six months of 2008. FEMSA’s brands, however, delivered volume growth of nearly 8% during the same period. Tecate is one of the fastest-growing import brands in the US.

Convenience stores are a dull business in the US, but an important growth opportunity in Mexico. Revenue from the OXXO chain has grown tenfold in the past decade, from just $420 million in 1998 to $4.2 billion today. FEMSA has also made the business more efficient, boosting convenience-store EBITDA margins to nearly 6% [from] 3.4% in 1998.

Still, FEMSA has plenty of room to expand. Convenience stores in Mexico are nowhere near as ubiquitous as they are in the US. FEMSA expects to double the number of stores to 12,000 by 2015.

In this tough environment, FEMSA offers a rare combination of both value and steady growth. Over the past ten years, FEMSA has delivered a compound annual revenue growth rate of 17% and 16% compound annual growth in operating income. Yet, at a recent $27, FEMSA trades for just 11 times 2008 estimated earnings.

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