Topics: Mexico, Mexican cuisine, Mexican Stock Exchange Pages: 312 (25050 words) Published: January 17, 2013
Equity Research
Latin America
Food Products
Sector Note
16 October 2012

Mexico Food & Beverage
Mexican Food: Rich but tasty – Initiating Coverage
Rafael Shin

Initiating coverage on the food sector
We are initiating coverage of Mexican food companies Grupo Herdez, Grupo Bimbo

and Gruma with BUY, NEUTRAL, and NEUTRAL ratings, respectively. This initiation +1 646 924 2472 brings our coverage of Mexico consumers to 9 stocks and of Mexico as a whole to 22. Gordon Lee

Choose depending on five drivers
After an outperformance of 18% YTD vs IPC, we believe an improving outlook has been priced in. With valuations at record highs, investors should be highly selective—
+1 646 924 2473

in this report, we present a simple framework with which to evaluate a stock based on Thiago Duarte what we think are the 5 most important characteristics: pricing power, exposure to

+55 11 3383 2366

Mexico, earnings momentum, valuation, and visibility of generated cash. Herdez (Buy) our top pick in the sector. Premium is deserved Grupo Herdez (Buy) is a success story that we believe will look even better as consumption in Mexico continues to strengthen. Its unique business model has enabled the company to enjoy one of the highest returns among food companies in Latin America. Although valuations are rich we believe premiums are deserved, offering a 20% return from current prices. With a YTD ADTV of US$1 mn, liquidity is biggest issue.

Bimbo (NEUTRAL) is a core holding, but we would wait for a better entry point Bimbo (Neutral) is an attractive deleveraging story with upside from a restructuring effort, and potential industry consolidation in its international markets in the long run. However, current valuations offer limited upside and we see a rocky road in the coming 6 months due to Sara Lee’s integration and rising input costs. We also take a deeper look at risk coming from multiemployer pension plans in the US. Gruma is rated NEUTRAL after a rally of 40% YTD

Gruma (Neutral) is well positioned to deliver an earnings surprise, as it is highly leveraged to the recovery of the US consumer and has more favorable hedges than its peers for 2H12 and 2013. Succession issues and a favorable outcome in Venezuela are also a positive catalyst. Nonetheless, most benefits have been priced in at current prices and business looks weak from a fundamental perspective (ie our 5 key drivers).

Table 1: Mexican Food – Summary

Company Rating

C urrent Price
Price Target Cap (US$) 2012E 2013E 2012E 2013E Div. Yield



35.7 P$42.0



31.5 P$34.0



37.4 P$39.0

$1,203 10.4x

9.5x 20.8x 18.4x


$11,564 13.5x 10.6x 36.2x 23.1x




5.6x 14.7x 12.6x


Source: BTG Pactual, Bloomberg

ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 60 Banco BTG Pactual S.A. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

Mexico Food & Beverage
16 October 2012

page 2

FOOD INDUSTRY IN MEXICO – Our investment case
This initiation brings our coverage of Mexico consumers to 9 stocks and of Mexico as a whole to 22. In the introductory section of the note we lay out a general outlook on the sector and discuss a framework to select a stock based on five drivers: 1) pricing power, 2) exposure to Mexico, 3) earnings momentum, 4) valuation, and 5) visibility on generated cash flows. After factoring all these elements, we conclude that Grupo Herdez stands as our top pick among the food stocks, followed by Grupo Bimbo and Gruma.

Margins at food companies in Mexico...
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