Coca-Cola FEMSA Retains Its Pop

We are keeping our Buy recommendation on Coca-Cola FEMSA S.A. de C.V. (KOF). The company posted better-than-expected results for the first quarter. It has 32 bottling facilities in Latin America and currently accounts for almost 10% of Coca-Cola global sales and approximately 40% of all Coca-Cola sales in Latin America.

The short-term outlook for Latin American economic growth remains positive and the company benefited from the strength of most Latin American currencies. The company's management recently approved a proposal to pay out US$88.4 million in dividends this year. We understand that the geographical diversification of the company will be very helpful in the following months.

We believe there is considerable room for growth in the short term in the non-traditional products, and Coca-Cola FEMSA has been taking advantage of this trend. Our outlook for the Beverages industry is positive. Although the U.S. market is mature for carbonated beverages, we see huge growth potential in other less-developed markets and for non-carbonated drinks.

Currently, Coca-Cola FEMSA is trading at 15.6x our 2008 earnings estimates, in line with the industry mean and the median. Considering the first quarter results and the positive outlook for Latin America, we believe the valuation of the stock is still attractive.

Although we believe that KOF is negatively affected by the exposure to the volatile Latin American business environment, we think its shares have a considerable upside potential and raise our target price from US$60.00 to US$68.25 based on the fact that the U.S. economic environment is not as bad as it appeared some weeks ago.

Fair Value for Aftermarket Tech

Aftermarket Technology Corp. (ATAC) is the largest remanufacturer of transmissions worldwide, with an 8% market share. This market grows at 6% annually and should continue to grow due to an increasing number of four-to-nine-year-old vehicles on the road.

The logistics and drivetrain segments are well set for future growth, which makes us optimistic. However, soaring raw material prices and demand for concessions by a few customers such as Ford (F), DaimlerChrysler (DAI), Honda and Cingular (all four comprising 81% of sales) are expected to keep margins under pressure. Hence, we recommend a Hold.

ATAC's logistics segment represents about 70-75 % of the company's business and coupled with continued strength in wireless and mobile devices distribution, is driving revenue growth. The Drivetrain business has revenues of $200-210MM and is also positioned to do well in the long term, primarily driven by strength in its business with Honda.

Currently, ATAC shares are trading at 10.9x our 2008 EPS estimate of $2.04.