Company Overview
Ambev S.A. (NYSE: ABEV) produces, distributes, and sells beer, carbonated soft drinks (CSD), and other non-alcoholic and non-carbonated (NANC) products in 18 countries across the Americas. The company is part of Anheuser-Busch InBEV (ABI), the largest global brewery group, which holds approximately 60 percent of the company’s outstanding shares.
Ambev is the largest brewer in Latin America in terms of sales volume. The company’s products include Brahma and Skol, two of the ten best-selling beers in the world. Ambev is also one of the largest independent PepsiCo bottlers. Ambev is a publicly held corporation incorporated in Brazil, and trades as an American Depository Receipt under the symbol ABEV.
Operating Segments
The company is divided into three distinct operating segments:
Latin America North consists of the company’s Brazilian operations and all operations in Central America and the Caribbean (CAC), which include the Dominican Republic, Saint Vincent, Antigua, Dominica, Cuba, Guatemala, Barbados, and Panama. Due to the size of the Brazil region, beer and CSD/NANC sales are reported separately.
Latin America South consists of the company’s operations in Argentina, Bolivia, Paraguay, Uruguay, and Chile.
Canada consists of all Labatt operations which include domestic sales within Canada and some exports to the U.S. market.
The revenue generated by each segment is detailed in the table below:
Source: Company Filing
As shown above, Ambev derives more than 50 percent of its revenue from Brazil, and 85 percent of that is attributable to beer sales. Latin America South accounts for 22 percent, while Canadian sales represented just 14 percent of revenue in 2016.
Market Overview
Brazil was one of the largest beer markets by volume in 2016, reaching an estimated 120 million hectolitres. Beer is primarily sold in bars for on-premise consumption, although beer is also sold in supermarkets for off-premise consumption. The company estimates that its Skol, Brahma, and Antarctica brands comprise two-thirds of the Brazilian beer market. The closest competitors include Petropolis (14%), Heineken (9%), and Basil Kirin (9%).
The CSD and NANC markets are comprised of many products, including CSD, bottled water, energy drinks, coconut water, powdered juices, and ready-to-drink teas. Ambev’s various brands only held a 19 percent market share in Brazil, while the Coca-Cola Company family of brands held more than 60 percent. In addition to Coca-Cola, the company faces significant competition from small regional bottlers known as “B Brands” who offer products at significantly lower prices.
While Brazil has recently been grappling with a prolonged recession, Ambev has performed consistently under a variety of market conditions.
Source: Company Presentation
Recent Developments in Brazil
Over the past 12 months, Brazil has faced tremendous political uncertainty as it deals with the fallout from a multi-year corruption investigation. Important developments include the following:
- August 2016: President Dilma Rousseff is impeached and is replaced by Michel Temer
- December 2016: Anti-corruption protests continue after a lower house of Congress weakened anti-corruption measures in proposed legislation
- May 2017: President Michel Temer is accused of trying pay off a key witness in the ongoing corruption investigation
- September 2017: Michel Temer is formally charged with obstruction of justice
Second Quarter Earnings Review
Net sales for the second quarter of 2017 decreased one percent from the same period one year ago, but increased nearly five percent on an organic basis. Growth was driven by Ambev’s operations outside of Brazil, including Latin America South and CAC, while Canada was roughly flat. In Brazil, volumes declined nearly five percent.
The company’s cost of goods sold increased 11 percent to R$4 billion, and gross margin fell slightly as a result to 61 percent. This increase was attributable primarily to inflationary pressures and unfavorable foreign exchange movements. Selling, general, and administrative expenses increased slightly, but were well below the weighted-average inflation rate due to efficiency gains. Accordingly, normalized net profit was R$2.1 billion, or R$0.13 per share, as compared to R$2.2 billion, or 0.13 per share, reported in the second quarter of 2016.
Cash from operations increased 17 percent to R$2.4 billion, while capital expenditures decreased by more than one-third to R$751 million. At June 30, 2017, the company had a cash balance of R$8.8 billion and a working capital deficit of R$3 billion. Ambev listed interest-bearing debt R$4.9 billion on its balance sheet, yielding a debt-to-equity ratio of 0.1. Furthermore, the company had paid R$3.6 billion of dividends to investors through June 30, 2017.
Stock Influences
- Overall improvements in the Brazilian economy and other Latin American states;
- Inflation and foreign exchange movements;
- Changes in overall profitability and cost structure; and
- M&A activity.
Risk Factors.
- There is significant economic and political uncertainty in Brazil, and these factors have already shown to have a demonstrable impact on Brazilian assets;
- The company’s results are subject to fluctuations in exchange rate movements, and the possible devaluation of the real relative to other currencies;
- The company may face higher taxation, and unfair competition from companies seeking to evade higher taxation; and
- The company has significant cost exposure to commodities, and fluctuations may adversely affect the company’s performance.
Stock Performance
As of September 15, 2017, shares of Ambev closed at $6.81, up approximately one percent on the day, yielding a market capitalization of approximately $100 billion. In the past year, shares of Ambev have traded erratically, largely due to the political upheaval in Brazil discussed above. Large sell-offs typically lined up with major news developments. The stock traded as low as $4.70 in December, but recently hit a one-year high of $6.82. So far, this year, the shares have gained nearly 40 percent.
Following are selected analyst ratings and price targets:
| Analyst | Firm | Rating | Price Target | Date |
| Thiago Duarte | Neutral | Neutral | $5.57 | 9/5/2017 |
| Robert Ottenstein | Evercore ISI | Outperform | $7.00 | 8/1/2017 |
| Pedro Leduc | J.P. Morgan | Overweight | $6.20 | 7/31/2017 |
Summary
Ambev has a well-diversified portfolio with respect to products and geography. In addition to a dominant position in the Brazilian beer market, the company has a strong foothold in the rest of Latin America and a reliable business in Canada (Labatt). Despite some macroeconomic headwinds, the company has delivered solid first half results that are likely to see some improvement in the second half.
The ongoing concern is the overall political climate in Brazil, which has been highly charged for more than a year. While the corruption investigations will not have a direct impact on the company’s results, there have been large sell-offs when new developments emerge. Overall, the stock has been on an upward trajectory, and long-term holders are rewarded with dividends for riding out short-term price volatility.
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