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GuruFocus’ Takes on Barron’s Weekly Recommendations: Ambev (ABV) and Coinstar (CSTR)
Posted by: gurufocus (IP Logged)
Date: December 18, 2011 05:58PM
Every week, Barron’s publishes its recommendations with two stocks. This week the recommendations are Brazilian Brewer Ambev (ABV) and quick movie rental Red-Box operator Coinstar (CSTR).
Ambev (ABV): A Heady Outlook
Barron’s published an article called “A Heady Outlook”, recommending Brazilian Brewer Ambev (ABV). It says these are positives with Ambev:
1. Ambev is the largest beer producer in Brazil—where it has a 70% share—and Latin America in general. With annual production of about 119 million hectoliters (100 million barrels), it's the world's fifth-largest brewer. Its parent, Anheuser-Busch InBev, whose stock (BUD) trades separately, is No. 1. Ambev is also the largest PepsiCo bottler outside the U.S., selling and distributing products such as Lipton Ice Tea and Gatorade. Ambev operates in 14 countries, including Canada. Beer generated more than 80% of its $15 billion in revenue last year; soft drinks, the rest.
2. Ambev has a history of strong profit and stock-market gains. And with its excellent position in fast-growing markets, past should be prologue for the Brazilian brewer.
3. Ambev's ADRs trade at 20 times analysts' earnings estimate of $1.81 a share for next year, a higher multiple than peers like SABMiller (SAB.U.K.). But bulls argue that the company deserves a premium valuation, given its consistent earnings gains and presence in high-growth emerging markets. Some maintain that it might even deserve to trade at a 25 price/earnings ratio, which would put it at $45 a share, about 29% above the recent price.
4. Longer term, beer consumption is likely to keep rising in Brazil, where the minimum wage is soon expected to increase by 7.5%—and some regions still drink relatively little beer. In addition, premium, higher-priced brews account for just 5% of Brazilian consumption, versus 20% in the U.S. Ambev should be able to boost its premium sales with brands such as Stella Artois and Budweiser. And Brazil's hosting the 2016 Olympics and 2014 soccer World Cup should be boons for the company. Bottoms up!
What GuruFocus likes about Ambev (ABV):
1. The business and its position. This is certainly a simple business that is easy to understand. Its dominance in the market it serves gives it strong brand recognition. The business certainly has the moat that Warren Buffett loves. By the way, Warren Buffett used to own a large position in Anheuser-Busch, which was acquired in cash by Ambev’s parent InBev (BUD). InBev now trades in the U.S. under the original Anheuser-Busch ticker, BUD.
2. GuruFocus likes the growth. Over the past five years, Ambev grew its revenue by more than 13% a year and its earnings by more than 35% a year. Please take a screenshot of the revenue and earnings on our new Interactive Chart.
3. The long-term expansion of its profit margins. The expansion of the profit margin makes it possible for Ambev to grow its earnings much faster than revenue. For more, take a look at the charts of Ambev’s 10-year financials.
4. Ambev has strong balance sheet. As of Sept. 30, 2011, the company has more than $4 billion of cash and short-term investments. Its debt is only about $1.35 billion.
5. The company may still see years of fast growth ahead.
What reservations GuruFocus has:
Actually not many other than that Ambev is now traded at its all-time high of $35.91. It is also traded at the highest level of valuations in terms of P/S and P/B. But if we look at its valuation from our DCF calculation, at current prices it is probably not overvalued. It is probably a situation of a “great company at a fair price.”
It is worthwhile to keep Ambev on a watch list. Hopefully the market volatility will provide better opportunities for investors who want to buy good companies and hold them forever.
Coinstar (CSTR): Still Money in the Bank
Barron’s published an article called Coinstar: Still Money in the Bank that recommends DVD rental Red-Box operator Coinstar. These are Barron’s takes:
1. The competitive landscape looks favorable because Redbox's prime rival, Netflix (NFLX) is focused on streaming video and international expansion, rather than its original U.S. DVD-rental business, while Blockbuster has gone bankrupt and shuttered many stores.
2. In the third quarter, Redbox, which operates solely in the U.S., was the leader in DVD rentals with a 35% share, 10 percentage points above the year-earlier level.
3. In the most recent quarter, Redbox kiosk revenue jumped 27.7% nationwide from the total a year earlier, while video-on-demand sales rose just 5%.
4. Coinstar is coming off a strong third quarter in which it had $465 million in revenue, up 22.5% year-over-year, as net income rose to $1.18 a share from 66 cents.
5. Part of the Coinstar bull case is that Redbox has a lot of pricing power as the lowest-cost video-rental company. It's also still growing, with 34,400 kiosks at the end of the third quarter, versus 28,400 a year earlier.
6. In any case, with DVD rentals still climbing and America's love of a bargain unextinguished, Redbox is likely to thrive a lot longer than many investors expect.
GuruFocus’ thoughts on Coinstar:
1. Coinstar is certainly a simple business. The company has positioned itself very well in terms of competitiveness and price power. Its network also sets up a nice barrier for others to duplicate what it is doing.
2. The growth has been nice, averaging more than 25% a year in revenue for the last decade. The earnings growth was about 22%.
3. But the gross margin has been declining, which is why its earnings are growing slower than revenue. This is exactly the opposite with the situation in Ambev. See CoinStar’s 10-year financials.
4. At current valuation, the company is not expensive, but it is not extremely cheap either.
5. Being in a competitive and relatively fast-changing business, the company may have to continuously adjust its business model over time. The long-term trend of DVD video itself has a large impact on its business.
6. This is not a business that investors can buy and hold forever.
Related links: GuruFocus Interactive Chart, Ambev DCF Calculation, price-to-sales and price-book
Stocks Discussed: ABV, BUD, CSTR, NFLX,