South America a Bright Spot in Coke Femsa’s Solid 2022

We are maintaining our $83 fair value estimate for wide-moat Coca-Cola Femsa KOF after absorbing the bottler’s 2022 results, which included revenue of MXN 227 billion (3% better than our estimate) and net income of MXN 19 billion (in line with our projection after adjusting for deferred taxes). Our 10-year forecast for 6% sales growth and operating margins averaging 14% remains in place. The current share price implies a 12% discount, though we suggest investors wait for a better entry point as macro and political volatilities in Latin America call for a wider margin of safety.

Achieving year-over-year increases of 16% in sales and 21% in net profits is no small feat, which we attribute to prudent growth strategies, agile in-market execution, and supply chain efficiency enhancement (resulting in MXN 20 million in savings). We are particularly impressed by accelerating volume expansion (9% in 2022 versus 2% on average over the past four years), which supports our view that the bottler’s strategic focus on affordability programs and the underserved traditional trade channel should help the firm garner further volume share gain in the Coke system in the region (from 27% currently).

At the segment level, we are most encouraged by the strong recovery in South America (42% of sales, primarily from Brazil), led by a notable 8% increase in revenue per case that reversed declines averaging 5% over the past four years. While we don’t see macro headwinds subsiding, we believe Coke Femsa’s consolidation in Brazil (with volume share in the mid-50s) has led to better coordinated, and thus more productive, marketing and point of sale execution, which should drive price mix improvement in the coming years. Given the growth potential in South America (volume at 72% of Central America despite a 40% larger population), we expect Brazil and its neighbors to remain a growth focus for Coke Femsa, with both organic expansion and tuck-in acquisitions.