Is Femsa the Perfect Stock?
Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?
One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Fomento Economico Mexicano (NYS: FMX) fits the bill.
The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:
- Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
- Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
- Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
- Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
- Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.
With those factors in mind, let's take a closer look at Femsa.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||8%||Fail|
|1-Year Revenue Growth > 12%||8.7%||Fail|
|Margins||Gross Margin > 35%||41.7%||Pass|
|Net Margin > 15%||7.7%||Fail|
|Balance Sheet||Debt to Equity < 50%||18.6%||Pass|
|Current Ratio > 1.3||1.55||Pass|
|Opportunities||Return on Equity > 15%||31.1%||Pass|
|Valuation||Normalized P/E < 20||21.37||Fail|
|Dividends||Current Yield > 2%||1.5%||Fail|
|5-Year Dividend Growth > 10%||36.1%||Pass|
|Total Score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With five points, Femsa is neither flat nor fizzy. But the Mexican beverage giant is anything but average.
Femsa has three different major segments. It owns a majority stake in Coca-Cola Femsa (NYS: KOF) , which is a joint venture with the American cola king and contributes about half of the overall company's revenue. But the company's original beer business still goes strong, with well-known brands including Dos Equis and Tecate. In addition, Femsa also owns convenience store chain Oxxo.
With its combination of valuation and growth potential, Femsa actually stands out from its competitors. As fellow Fool Ilan Moscovitz recently discovered, using basic assumptions about future performance, Femsa has about twice the return potential of Coca-Cola (NYS: KO) and several times that of Dr Pepper Snapple (NYS: DPS) and PepsiCo (NYS: PEP) .
But the hot market south of the border has plenty of competition. The Anheuser-Busch InBev (NYS: BUD) merger has a majority stake in beer rival Grupo Modelo, and with Ambev (NYS: ABV) also under InBev's thumb, Femsa could find itself boxed in trying to compete for the growing South American market.
For Femsa, the key to perfection is in continued growth. Although a global slowdown could temporarily derail Mexico's long-term economic recovery, the potential south of the U.S. is huge. If Femsa can successfully tap into not only its home market but also the entire Latin American region, it could easily become a perfect stock in time.
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.
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Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our "13 Steps to Investing Foolishly."
At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Coca-Cola and PepsiCo. Motley Fool newsletter services have recommended buying shares of PepsiCo, Coca-Cola, and Femsa, as well as creating a diagonal call position in PepsiCo. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.
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