Case Studies

Arca’s International Footprint

Arca Continental bottles Coke products in northern Mexico, Ecuador, Peru (through its controlling stake in Lindley), and northern Argentina, and the company will soon control the bottling rights for almost all of Texas along with parts of Oklahoma, New Mexico, and Arkansas.  Beyond beverages, Arca also sells snacks in Mexico, the U.S., and Ecuador through their brands Bokados, Wise, and Inalecsa.  Via its ownership in Tonicorp, Arca is the #1 value-added dairy company in Ecuador.  Over the years, we have spent extensive time with management in Monterrey, Mexico, as well as having been given unfettered access to managers at all levels of the organization – from the CEOs of Lindley and Tonicorp to the sales managers for Santiago del Estero, Argentina and Northern Quito, Ecuador.  The Arca customer-centric way of doing things is exemplary, is repeatable, and permeates the company.  Pancho Garza and his team run one of the finest organizations in the world.   

It is therefore no surprise to us when they continue to exceed expectations.  Arca territory in northern Mexico has the highest per capita consumption in the world, yet Arca still grew volume 8% in the region in 2016.  The macro environments continue to be headwinds in Argentina, with the end of the Kirchner era, and in Ecuador, which has been impacted by lower oil prices and the terrible earthquake.  Nevertheless, we expect these to be good markets for Arca over the next ten years.  Additionally, Arca reduced its leverage ratio from 1.9 times net debt to EBITDA to 1.3 times in 2016, continuing the company’s long-standing aversion to debt and increasing its flexibility to capitalize on future growth opportunities. 

Despite its solid business performance and growth opportunities, Arca was the worst performing Fund stock in 2016.  The lead-up to the U.S. election and the ultimate result hurt both the Mexican stock market and the Mexican peso.  While many large Mexican companies are big exporters to the U.S. market, Arca exports few of its goods – for the most part products that are made in Mexico are sold in Mexico, and products sold in the U.S. are produced in the U.S.  Accordingly, a renegotiation of NAFTA should not affect Arca directly.  A slowdown in the economy in northern Mexico, however, would have an adverse effect, but Arca has successfully withstood recessions before with its largely non-cyclical portfolio.  Given our long-term expectations for the business and confidence in management, we hope the market’s near-term concerns about Mexico continue to push Arca share price lower, which would allow us to increase the Fund stake at attractive prices.