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We are keeping our Buy recommendation on Coca-Cola FEMSA S.A. de C.V. (KOF). On April 25, 2008, Coca-Cola FEMSA reported better-than-expected first quarter 2008 results. Total revenue reached MXN$17,257 million (US$1,597.7 million) from MXN$ 18,361 million in the previous quarter, and MXN$ 16,225 million in the first quarter of 2007. Revenues in the Mexican business increased 6.7% year-over-year, and average price per case went up 1.8%.
Central American revenues increased 3% year over year, and average price per case decreased 1.8%. The results in the Mercosur division were particularly impressive, and its Mexican results also showed a considerable improvement. Additionally, the short-term outlook for Latin American economic growth remains positive, despite the difficult economic environment in the U.S. and its effects on Mexico.
The company also benefited from the strength of most Latin American currencies, a trend that should prevail in the following quarters. KOF has been reducing net debt, a necessary step to reduce financial costs and increase confidence.
Currently, Coca-Cola FEMSA is trading at 13.8x our 2008 revised earnings estimates, a considerable discount to the industry mean and median. We believe the discount is due to the company's exposure to the volatile Latin American business environment, the competitive business environment and the company's above-average leverage.
Considering the better-than-expected first quarter 2008 results and the positive outlook for Latin America for the following quarters, we believe the stock's valuation is still attractive, in spite of the threat from the U.S. economic concerns. We think KOF's shares have a considerable upside potential and deserve a valuation closer to the industry median. We are using a P/E multiple of 16x our 2008 revised earnings estimate to calculate our target price of $60.
Read the full analyst report on KOF.
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