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Joaquín Sánchez

Joaquin Sanchez, CFA
10.jan.20

Signum Perspectives

Who win the battle between Coke and Pepsi and among the Mexican Bottlers?

Pepsi and Coca Cola vie for leadership of the carbonated beverage business not only in the world but also in Mexico.

While they have similar business models, their structures are different: Pepsico is a food sector giant with only 50% of its revenues coming from the beverages segment, while Coca-Cola focuses relatively more on its Beverages portfolio and is a market leader.

Coca-cola is also priced higher than Pepsi. According to Profeco, (The government institution having the responsibility of the Mexican consumer protection), the average price of an original Coke can of 12 ounces has an average price of P$13.22 in Mexico City, while the same presentation for a Pepsi has an average price of P$10.61, that is almost 20% cheaper.

In Mexico they operate through three main bottlers that trade on the Mexican Stock Exchange:

1.- Arca Contal (ticker symbol: AC*) a Coca-cola bottler that operates mainly in the northern and pacific areas of the country whose operation in Mexico represents only 42% of revenues; its U.S. Beverage and Snacks operation and South American operations account for the rest.

2.- Coca-cola Femsa (ticker symbol: KOF UBL) the world’s largest Coca-cola bottler with operations in central and southern Mexico, including Mexico City. Mexico accounts for 47% of its revenues and Central and South America the rest.

3.- Cultiba (ticker symbol: CULTIBAB) is a holding company with a 40% stake in Pepsico’s beverages business in Mexico. Its operation spans the whole of Mexico, but it also consolidates a sugar production business that represents more than 22% of its revenues.

Between December 30th and 31st, 2019, Cultiba rallied more than 60% from $9.56 to $15.36. While the company reported solid sales and EBITDA growth, the appreciation may have been due to news related to its sugar business: due to a shortage of sugar in the U.S., the Department of Agriculture announced an increase in the quota of Mexican sugar imports.

Nevertheless, as of today Cultiba staged a correction to $11.28 implying a -27% start for 2020.

We compared the performance of the three public bottlers that operates in Mexico. The beverages business has definitely had a bad year with negative returns derived from soft consumption and low volume growth owing to a change in consumer patterns.

Cultiba, which is the only bottler in Mexico with a presence throughout the country, also displays lower profitability margins and its sales mix results in cheaper products (water jugs represent 47% of its portfolio).

Arca Contal’s business is more profitable its strength lying in the direct-to-home model, as more than two thirds of AC’s sales volume corresponds to returnable presentations. This format is more profitable and makes the company the undisputed leader in Mexico in terms of volume growth and profitability margins.

At the same time, its international business is relatively less risky with the U.S. representing more than 36% of revenues and Ecuador, Peru and Argentina the rest.

AC* is therefore our top pick in the Beverages sector with a 2020 target price of P$124, which implies upside potential of more than 20%, which hinges mostly on stronger consumption, low inflation and higher economic growth in Mexico mainly underpinned by greater public spending.



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