Coca-Cola FEMSA

Coca-Cola Femsa's comparable sales rose 7% in the second quarter, including South America up 14% and Mexico and Central America up 2%. Adjusted EBITDA was up 14% on a comparable basis as margin expanded 130 basis points. However, currency headwinds continued.

Why it matters: While Coca-Cola Femsa's Mexico results continued to be pressured by the excise tax increase and a challenging economic environment, its efforts appear to be blunting the effect, with volumes up 1% over the prior year amid share gains. Results benefited from the World Cup (strong demand in host cities), affordability efforts, Coca-Cola Zero expansion, a focus on core brands across price points and consumption occasions, and innovation. While the World Cup has ended, we think the other efforts will continue to deliver. Management raised guidance for full-year volume in Mexico to be slightly down to flat, up from down 2% to down 4% previously. Depending on how volumes respond to August price increases, the firm may raise guidance again later this year.

The bottom line: We expect to increase our $105 fair value estimate by a low- to mid-single-digit percentage for wide-moat Coca-Cola Femsa. The increase stems from a more favorable volume response to price increases from the Mexican excise tax than we previously expected. Shares were up 6% on the results, as the market reacted positively to the outperformance in Mexico. We see shares as fairly valued, especially with the uncertainty around a looming excise tax increase in Brazil. This tax may be implemented in 2027 or 2028, depending on when legislation is passed that sets the rate. It may range from 2%-10%, with the magnitude determining whether the company passes on the entire increase or takes a stepped approach.

We raised our fair value estimate for Coca-Cola Femsa to $106 per ADR from $105. We've increased our near-term growth forecast as the volume hit from the increased Mexican excise tax is far weaker than we had expected. We now forecast average volume growth in Mexico and Central America of about 0.3% over the next two years, compared with our prior forecast of a 2.1% decline. However, this is partially offset by a weaker peso since our last update and an increased cost-of-capital assumption (now 9.6% from 9.3%), which we believe better captures the risk associated with its Central and South American footprint. We assume an exchange rate of MXN 17.35 per $1 as of Aug. 2. Our intrinsic valuation implies a 7.4 times multiple on 2027 enterprise value/adjusted EBITDA.

Coca-Cola Femsa's comparable sales rose 7% in the second quarter, including South America up 14% and Mexico and Central America up 2%. Adjusted EBITDA was up 14% on a comparable basis as margin expanded 130 basis points. However, currency headwinds continued.

For 2026, we forecast 0.2% volume growth in Mexico, weighed down by the sugar tax. We forecast prices to rise by 10% as the tax is passed on. Meanwhile, we think the price mix of 5% and volume growth of 5% look achievable in South America. As such, we forecast overall sales growth in 2026 to of 6.8%.

Over our 10-year forecast period, we expect revenue growth to average 6.9% annually. We expect sales growth in Mexico and Central America to be led by pricing (6%), driven by a favorable product mix and greater exposure to away-from-home occasions, single-serve offerings, and still beverages. Meanwhile, we expect volume to be a key growth driver in South America, driven by growth in Brazil following capacity expansions, and stepped-up activation and engagement with traditional trade. We expect the region to make up 52% of the bottler's volume by the end of our forecast period, up from 42% in 2025. Coke Femsa has historically augmented organic growth with strategic acquisitions, and we expect it to continue doing so. However, given a lack of information about its acquisition pipeline, we refrain from incorporating such deals into our financial modeling until we gain better visibility.

We model the operating margin to expand by 80 basis points over the 10-year forecast period, reaching 15.0% by 2035, up from 14.2% in 2025. The margin expansion is primarily driven by our expectation that gross margin will widen by 70 basis points over the same period to 46.3% by 2035, due to improvements in manufacturing and distribution efficiency and a slightly more favorable sales mix, with higher sales from still beverages. In addition, we expect some leverage of labor and distribution expenses (28.7% of sales by 2035, versus 29.0% in 2025). We see a small offset, with marketing and advertising spending rising as a percentage of sales to 2.6% by 2035, up from 2.4% in 2024. We think higher investments in the expanding nonsoda categories and digital initiatives are necessary to support its long-term growth.

We have awarded a wide economic moat rating to Coca-Cola Femsa, based on brand prowess and the entrenched retail relationships afforded by its status as a major bottler for wide-moat Coca-Cola and on its association with parent Femsa, one of the largest retail conglomerates in Latin America. Coca-Cola Femsa also benefits from significant efficiencies by leveraging its massive scale in manufacturing, distribution, and procurement of advertising services. We expect the company to deliver returns on invested capital (including goodwill) above our estimated roughly 10% weighted average cost of capital for more than 20 years. While we acknowledge that Coca-Cola controls brand and concentrate pricing, we believe the symbiotic relationship between Coke and its largest bottler, Coke Femsa, should incentivize the two parties to negotiate and reach long-term arrangements that allow the bottler to continue generating excess investment returns.

As the largest franchise bottler in the global Coke system (12% volume share in 2025, on our estimate), Mexico-based Coke Femsa benefits from strong consumer affinity to the iconic Coke brands across Central and South America and from tight relationships with retailers keen to drive traffic and sales with the Coke assortment. The bottler’s position is bolstered by Coke brands' unrivaled influence in Latin America (56% volume share in carbonated soft drinks in Latin America in 2025 versus 10% for PepsiCo, per Euromonitor) and the 10-year renewable agreements granting the bottler exclusive distribution rights in authorized territories across major countries including Mexico, Brazil, Argentina, and Colombia to serve 270 million consumers (40% of the Latin America population). As a result, Coca-Cola Femsa is well equipped to tap growth opportunities in this region, where per capita beverage consumption is one fifth of the level in North America.

Over the next 10 years, we expect Coke Femsa to maintain 2% annual volume growth by leveraging Coke’s innovation pipeline around low- and zero-sugar cola products and in nonsparkling categories such as alcoholic ready-to-drink beverages and tea. Volume growth should also be aided by accelerated multipack offerings of single-serve bottles that encourage consumer trial and adoption of a wider variety of Coke beverages. Given the aligned growth priority on volume between Coca-Cola and Coca-Cola Femsa and lower income levels in Latin America compared with developed countries, price increases were modest, averaging 2% between 2019 and 2023 before the respective increases of 10% and 6% in 2024 and 2025 led by hyperinflation in South America. We don’t think this reflects a lack of pricing power, but that the bottler is cognizant of affordability. We expect price mix to normalize at 5% over the next decade.

Coca-Cola Femsa has forged close relationships with retailers, securing access to prime shelf space and in-store display and promotions. The firm has built an expansive manufacturing and distribution footprint (56 factories, 251 distribution centers) spanning nine countries, giving itself significant advantages in ensuring reliable and timely product delivery, which is highly valuable to retailers in a region with spotty infrastructure. In addition, adapting to a highly fragmented grocery retail landscape in the region with a significant share of smaller, less sophisticated retailers (40% share by unorganized trade, per Euromonitor), Coke Femsa has invested in cooler placements in stores for better brand display and an enhanced beverage consumption experience and invested in dedicated mobile apps and websites to facilitate the inventory planning, ordering, and delivery scheduling. Such initiatives have bolstered the retail relationships it maintains and should help open more doors when the bottler adds non-Coke products including beer, spirits, and snacks to its assortment.

On the intangibles side, in addition to the Coca-Cola relationship, Coca-Cola Femsa operates under parent Femsa (with a 47% economic stake), one of the largest retail conglomerates that operates over 25,000 convenience stores, drugstores, and gas stations across Central and South America. While direct selling through Femsa’s retail channels has been limited (a low-single-digit percentage of Coca-Cola Femsa revenue), we believe Coca-Cola Femsa has benefited from its parent sharing market and consumer insights gleaned from tens of millions of annual purchase transactions. This is particularly useful to the bottler, considering how different market conditions and consumer preferences have been among the countries where it operates. In addition, we believe Coke Femsa’s entry into new markets, such as Colombia, would have been fraught with problems without its parent Femsa sharing best practices in areas such as government relations, labor laws, and logistics.

Cost advantages stemming from scale efficiencies in manufacturing and distribution and from procurement savings in advertising services form the second pillar of Coca-Cola Femsa’s economic moat. With a 2025 revenue base of MXN 292 billion, massive by Latin American consumer company standards, Coca-Cola Femsa is well positioned to maintain high utilization of manufacturing and logistics capacity and to implement time- and fuel-efficient delivery routes. We believe its manufacturing scale efficiency is a key factor in its ability to maintain gross margins around 45% over the past five years despite sharp fluctuations in dollar-denominated input costs. While we see limited scope for procurement savings in raw materials as purchases have to go through a handful of suppliers preapproved by Coca-Cola, we do expect its marketing budget of MXN 7 billion to give it bargaining power in in-store displays and promotions in local markets.

Coca-Cola Femsa can leverage strong retail relationships to drive volume growth in underpenetrated markets across Latin America, tapping soft drink demand with classic recipes and new products tailored to local tastes.

Steady volume share gain in Brazil bodes well for better brand recognition and scale benefits in this market of over 200 million consumers.

Investments in an internet-based ordering system and cooler placements should help Coke Femsa better align product planning, manufacturing, and its go-to-market strategy with retailers and resellers in the region.

Lower discretionary spending levels and less-developed transportation infrastructure in Latin America remain hurdles to the bottler’s efforts to increase consumption of Coke products.

Coke Femsa will continue to wrestle with macroeconomic and political instability in the region, which could weigh on margins and returns.

The sugar tax hike in 2026 in Mexico (50% of total volume) will likely have a negative impact on volume and test the bottler's ability to leverage affordability initiatives, marketing, and price mix to maintain demand.