BUD - Ambev: There Is Growth Brewing

2023-04-16 07:25:32 ET

Summary

• Ambev is a tenured South American brewer that also has an exclusive license to sell and distribute Pepsi drinks across Brazil.
• While experiencing a volatile - and often negative - revenue picture over the past decade, the last two years displayed healthy double-digit growth.
• This revenue growth uptick is directly in line with the appointment of a new CEO in Q1 2020, who seems to be doing well thus far.
• Along with these factors, the stock is discounted on both a P/E and a TTM operating cash basis vis-a-vis the Brewers GICS sector; it also yielded the highest dividend in the space over the past year.
• Considering all of these factors, I am calling Ambev a buy for the medium term.

Overview

As I sat there having a Stella, I started wondering – which company brews this? Could it be a stock? It turns out that Stella Artois – my personal favorite beer – is brewed by Ambev S.A. ( ABEV ). Ambev is a brewer headquartered in Brazil. It also turns out that the company is owned by AB InBev, so it is technically brewed by BUD. The stock continues to trade independently, however, and has its own set of financials for us to review.

Business

Before diving into the financials, it makes sense to understand exactly which beers this company is selling and where. Interestingly, this company does not brew or directly distribute beer in the United States of America. It turns out Stella Artois is imported by Ambev’s parent company BUD. Ambev’s core markets are in South and Central America, with the largest sales footprint in Brazil and Argentina.

The company sells a line of South American beers, with Stella being by far the most well-known here in the States. Other brands include Brahma and Bogota Beer Company.

Interestingly, this company is not just a purveyor of beers; it also sells soft drinks . Since 1999, Ambev has had the exclusive rights to sell and distribute Pepsi CSD (carbonated soft drinks) throughout Brazil. In 2002 this was expanded to include Gatorade. This is a unique element to the firm that distinguishes it from its brewer peers.

Financials

Having covered the business we can now cover the financials. Ambev has had an interesting growth profile throughout the last decade, having experienced significant fluctuations in its sales growth. After 3 years of decline, 2 years of growth, and another 3 years of decline, Ambev has put up two years of double-digit growth.

The revenue trendline is interesting here because the company appointed a new CEO (Jean Jereissati Neto) in January 2020. Given the rapid uptick in growth, it seems that he has been performing well in his role thus far.

As to gross margin, the company has faced pressures over the last decade and has seen it decrease. While starting the decade out at 67%, the firm now works with a 49.29% gross margin.

This has filtered through into a lower net margin, although the difference has not been as stark.

On an absolute basis, this company is generating less profits than it did at the beginning of the decade.

Nonetheless, it is also consistently cash-flow generative in addition to being profitable. Just like the other metrics, it does seem that this company is past its heyday – at least for now.

These financials indicate to me a brand that hit a certain level of size and then appeared to hit a slump over the past decade, all the while facing cost pressures on both a gross and net basis. The factor here that I’ll mention again is the relatively new CEO, who seems to be righting the ship. The bounce back in revenue growth – and the fact that absolute revenues are higher than they’ve been for a decade – are a very interesting data point. Ambev could be entering a new era of growth, although it’s too early to see that reflected across its bottom line metrics.

Valuation

Ambev is trading cheaply on both a TTM and forward price/earnings basis, with a discount across the board. Interestingly, this is occurring even as the company grew revenues at 15.39% last year – 145% of the sector median.

Additionally the company is also trading at a solid discount on TTM operating cash flow basis.

The icing on the cake is that the company presently has the highest dividend yield in the Brewers GICS sector, at nearly double the median. I would advise caution as to treating this as a dividend stock, however; it appears this company is in growth mode and it has a track record of paying out dividends in non-linear installments. Nonetheless the beer business tends to be a stable one and I would expect the continuation of some kind of payout at least once a year going forward. I’ll reiterate that I perceive the dividend here as augmenting the return – the icing on the cake – but what is much more exciting is the recent 2 years of strong revenue growth.

Conclusion

This is a tenured brewer that seems to be returning to growth with the appointment of its new CEO. It is also diversified into soft drinks, a category which appears to be doing well for the firm. Furthermore it is trading at a cheap P/E and cash valuation while posting the highest dividend yield in the space over the past year. This stock looks handedly to be a buy from my perspective.

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