Citigroup Upgrades Coca-Cola Femsa Citing Valuation, Says 2017 Cost Outlook Remains Mixed

Following the 12 percent correction since late July in Coca-Cola FEMSA, S.A.B. de C.V. (ADR) KOF shares, Citi’s Alexander Robarts believes the year-on-year Venezuela H2:16 EBITDA margin contraction and the persisting decline in Brazil volumes are mostly priced in.

Robarts upgraded the rating on the company from Sell to Neutral, with a price target of $72.

H2 Expectations

“In 2H16, we continue to expect flattish Mexican EBITDA margins in 2H16, despite HSD sales growth, and margin expansion in Argentina and Colombia,” the analyst mentioned.

Although a potential sugar tax hike could be on the cards for Colombia and the Philippines, Robarts believes the risk of a tax hike remains low in Mexico given that oil prices have somewhat recovered.

Related Link: Credit Suisse Upgrades Coca-Cola Femsa To Outperform

“More stable Mexican peso/dollar f/x (after two years of double-digit depreciation) should provide some dollar COGS relief. However, higher concentrate and sugar prices should provide incremental margin pressure,” the analyst stated.

Catalyst

On the other hand, Robarts pointed out that there could be one upside risk, that of a “fairly” priced acquisition over the next 12 months in the United States of one of the remaining Coca-Cola franchise territories. This includes California, Nevada and possibly New York and Canada.

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