Ambev: Value And Income – Seeking Alpha

Posted: February 24, 2020 at 1:45 am


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Thesis Summary

Ambev S.A. (ABEV) is a distributor of beverages focused in Latin America. Currently, it is trading at historical lows which could offer a good entry point. I believe the business model is solid and expect it to remain profitable in the future. With a solid balance sheet, plenty of cash and an implied 2% yield, the company offers an interesting investment opportunity.

Ambev produces, distributes and sells alcoholic beverages and other refreshments. Its main products are beers which include Skol, Corona, and Budweiser. However, the company also sells a variety of juices, sodas and coconut water. Ambev operates in three segments which are divided geographically; Central America and the Carribean, Latin America South, and Canada.

The company has recently put out some disappointing results and the stock is now trading at its lowest ever, $3.63/share as of writing this. In this article, we will try to make sense of this to determine if this is a potential value buying opportunity. First, lets start with the most recent results available:

Source: Investor Relations 3Q Results

Both the quarter to quarter and yearly comparisons show a similar dynamic. Revenues have grown at a reasonable pace in the last year, around 7%, while EPS has not increased at all. This is due to a reduction in the gross and EBITDA margins.

Looking at the income statement, we can see that this is due to substantially higher costs of goods sold

Source: Investor Relations 3Q Results

Another interesting change is the difference between tax expenses, which in 2018 contributed $141 million while in 2019 it became an expense of $222 million.

In the section below I will cover some of the most relevant strongpoints of the company.

I like the Balance sheet, as the company is not overly indebted, with a Debt/Equity ratio of 0,04 and a quick ratio of 1. Looking at the evolution of the last few years, Ambev has done a good job of reducing its debt and this is no exception in the last year.

Source: Investor Relations 3Q Results

In the last year, the company has managed to increase assets and reduce total liabilities. Looking back, in 2009 Ambec had over $1 billion in long.term debt. Today, that number is much closer to $200 million. This is a testament to the proficient management and cash-generating ability of the company.

Ambev has the right to sell and distribute some of the biggest beer brands in the world, including the likes of Budweiser, Becks, and Corona. In terms of brand identity, the company has been for a long-time talking about Premiumization and is executing this practice quite well.

Source: cbc.co

Premiumization is the result of a change in the beer market. Consumers of beer are demanding more in terms of taste and branding, not every beer is made equally. To this extent, Ambev os well positioned as it has exclusive rights to some premium brands and is also developing and rebranding its beers. Recently it launched Skol Hops. Since close to 77% of the premium market in Brazil is dominated by the top 4 brands, there is plenty of room to take a bigger slice of the market from the incumbents. Furthermore, the company has a moat like characteristic, as it is the only distributor of these big names.

More importantly, Ambevs portfolio includes more than beer, with a wide array of other beverages that have in recent times performed quite well. Lets take Brazil, for example, one of the worst-performing segments.

Source: Investor Relations 3Q Results

NAB, (Non-Alcoholic Beverages) grew by 13.6% in terms of revenue. While profitability is still an issue here, it is clear that the company has a wide array of products that are in demand.

Finally, it is worth mentioning that Ambev pays a dividend, and why wouldnt they? Despite lower profitability, the company still has a healthy and growing cash & ST investment position of over $3.5 million. The company has consistently been paying out around 10 cents per share a year. This gives it a yield of around 2.71% at a payout ratio of only 20.17%. While there are many higher yields out there, it is an attractive source of income. Combined with the current potential for capital appreciation, this makes an investment in Ambev even more attractive.

In the section below I will cover some of the most relevant weaknesses of the company.

One of the main headwinds Ambev has been facing is that of reduced profitability. Even though the company remains quite profitable, with a 59.51% Gross margin, it is undeniable that the trend in the last 5 years has been downward.

Source: Seeking Alpha

As we can see. Gross Margin has decreased by over 10% in the last 5 years. This is due to increased input prices and also differences in local currencies purchasing power. Will Ambev be able to stop the bleeding? In this regard, the company is integrating various forms of logistical and data related technologies to optimize distribution. We should see this affects the next couple of years. Secondly, we can expect margins to improve if/when the South American region begins to grow quicker and people have more disposable income

This is another interesting point that can be seen as a weakness. While Ambev has a very well-diversified portfolio in terms of products, most of its operations are centered in Latin America. This means the future of the company is very much tied to the macroeconomic growth of the area. However, it is important to realize that, in the long-run, microeconomic factors should outweigh the macro. If you believe in the profitability of Ambevs business model, this shouldnt be a reason for concern.

Overall, it is not just Ambev that has been underperforming, but the whole sector. We must understand that markets are always changing, and to keep growing companies must adapt to the new demands of consumers. For example, people growing up now have become a lot more health-conscious, and alcohol is losing its appeal, as are sugary soft drinks. In terms of beer, there has been a great shift in recent years to craft beer. People want to feel that what they are drinking is special, and that is part of what premiumization is about. Changes in demand offer both a great challenge and an opportunity.

In terms of valuation, Ambev is now trading somewhat below the market. It has a P/E of 22, 6.72% below the market, and it is also quite undervalued if we look at EV/EBITDA. While this in and of itself is not enough for me to invest, combined with the relatively secure dividend, the current price offers an opportunity to capitalize on what could be a low-point in terms of the share price.

Overall, the company still has profitable operations and has a certain degree of resilience to competition and recession. My rating for this stock is just above neutral although I do not have a position.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Ambev: Value And Income - Seeking Alpha

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February 24th, 2020 at 1:45 am