Morgan Stanley upgrades Coca Cola Femsa stock rating to overweight

Morgan Stanley upgraded Coca-Cola Femsa (KOF) to Overweight, citing anticipated earnings resilience from strength in Mexico and Brazil, coupled with favorable hedges. The upgrade is further supported by the company's strong financial health, consistent revenue growth (13.7% over the last twelve months), and a projected EBITDA CAGR of approximately 4% from 2024 to 2026. The new price target of M$222 implies a potential upside of 20% with a 4.5% dividend yield, as analysts believe the market is underestimating the company's resilient business model and potential for an inflection point in the latter half of 2025 and into 2026.

Analysis

Morgan Stanley has upgraded Coca-Cola Femsa (KOF) to Overweight from Equalweight, signaling a positive outlook driven by anticipated earnings resilience. This resilience is expected from a second-half inflection in Mexico, which constitutes approximately 50% of KOF's $2.38 billion EBITDA, coupled with strength in Brazil and favorable hedging strategies. The company's fundamentals support this view, evidenced by an InvestingPro "GREAT" financial health score and robust 13.7% revenue growth over the last twelve months. Analysts highlight KOF's year-to-date underperformance relative to the BMV index as an investment opportunity, anticipating a significant volume rebound in Mexico during the second half of the year, easing comparisons, and resumed market share gains. Further bolstering the outlook are a strong gross profit margin of 46.2%, a 22-year history of consistent dividend payments, and favorable conditions in South America, which accounts for about 40% of EBITDA, including consumer resilience in Brazil and Argentina's recovery. Cost tailwinds, such as a 20% year-to-date reduction in Mexican sugar prices and a 16% decrease in PET futures for H2 2025, are projected to support EBITDA margin expansion. Morgan Stanley projects a ~4% compound annual growth rate for KOF's EBITDA in USD terms from 2024 to 2026, notably higher than the ~1% expected for their Mexico Food coverage. The new price target of M$222 implies a potential 20% upside and a ~15.5x trading multiple, aligning with historical averages, complemented by an approximate 4.5% dividend yield; InvestingPro also indicates the stock is slightly undervalued at its current $95 price. Recent corporate actions include the filing of its annual report for the fiscal year ended December 31, 2024, shareholder approval of a Ps. 15,462 million cash dividend for the 2024 fiscal year (to be paid in installments during 2025), and a Form 6-K filing in May 2025 related to a securities issuance, underscoring ongoing regulatory compliance and shareholder engagement.

Key Decisions for Investors

• Investors should consider the upgraded Overweight rating and M$222 price target, which suggest a favorable risk/reward profile given KOF's resilient earnings outlook, strong fundamentals, and potential 20% upside plus a ~4.5% dividend yield.
• Monitor key catalysts in the second half of the year, particularly the volume rebound and market share dynamics in Mexico, as well as the materialization of cost savings from lower input prices, which are crucial for achieving projected EBITDA growth and margin expansion.
• Evaluate KOF's current valuation in light of its year-to-date underperformance and the market potentially overlooking its inflection potential into H2 2025 and 2026, presenting an opportunity for investors seeking exposure to emerging markets and a defensive consumer staple with consistent capital returns.