Arca Continental Earnings: Strong Performance in Mexico and US but South America Weakness Persists

In its solid second-quarter results, wide-moat bottler Arca Continental recorded sales that rose 5% (9% in constant currency) and net profits that expanded 15%, as strong performance in core markets Mexico and the US (collectively 80% of total volume) more than offset persistent weakness in Argentina and Ecuador amid macroeconomic challenges. We think management deserves credit for sharper in-market execution, multicategory expansion, and heavy investments in channel relationships in Mexico and the US, which should continue to bode well for sales and profit growth. In South America, while we don't expect macroeconomic headwinds to subside, Arca's prudent investment in innovation (including returnable bottles) and promotion should protect its value proposition, positioning the bottler to take share as the market consolidates. Our 2024 forecasts for sales and adjusted EPS to rise 9% and 10%, respectively, remain, and we retain our 10-year projections for a 5% sales compound annual growth rate and 15% average operating margins. Shares look fairly valued.