The beverage market in South America has been weak in 2012, and 2013 didn’t start as strong as many had expected. That said, the market seems to be recovering as growth comes back to life, above all in Brazil, Latin America’s biggest economy. Here I want to take a look at two big South American brewers: Almighty AmBev (ABV) and the Chilean national champion Compania Cervecerias Unidas (NYSE:CCU).
AmBev, which is 68% controlled by AB-InBev (NYSE:BUD), the the biggest brewer in the world, is indeed the most efficient consumer goods company in the world. Its exhaustive cost conscious corporate culture, its aggressive commercial practices and its near monopolistic market positioning in most of the markets where it operates (Brazil, Argentina, Bolivia, Uruguay, Paraguay) have made it possible for the company to sustain its huge margins (AmBev's EBITDA margins are as high as 46%).
After a couple of lackluster quarters, the company seems ready to come back to growth. I would expect positive earnings momentum in at least the next year mainly given by: (1) The cancellation of tax increases in Brazil should help the company keep up with nearly double-digit price increases in beer, (2) The World Cup should boost volumes in 2014 and (3) Early expenses made during the first quarter of the year should help higher profitability.
Despite its great margins and the coming operational momentum, I think the stock price already reflects the company's huge value. AmBev trades at 2014 20.6 times P/E and 13.3 times EV/EBITDA. I would wait on the side-lines in order to buy or I would directly acquire its controller, AB-InBev, which trades at 2014 17.9 times earnings and 11.5 times EV/EBITDA.
An M&A target despite poor strategy
Compania Cervecerias Unidas has a nearly monopolistic market position in Chile's beer market (+75% market share) and controls over 20% of the Argentinean beer market. That said, the company's strategy is poor. Not only during the last four years CCU has lost almost 9% of its market share in Chile (which accounts for 44% of the company's EBITDA) but also the company has been reducing prices and acquiring businesses that are not related to beer or soft drinks. Actually, CCU has recently raised equity to fund M&A in the Andean region and the targets are supposed to be in consumer sectors that do not share much synergies with CCU's current businesses.
All that being said, CCU is a clear M&A target for a bigger company such as AmBev. It trades cheaply at 2014 14 times earnings and 8 .3 times EV/EBITDA, the company has no net debt and operates in a business with high barriers to entry. Despite all the aforementioned weaknesses, I would go long CCU at the current market prices.
As I always say, “price is what you pay and value is what you get.” AmBev, which is held by Lee Ainslie, is an amazing cash machine but I believe it is already fully valued. On the other hand, I believe CCU, which has been making strategic mistakes, is a buy. The company, which is held by Acadian Asset Management, is a great M&A target for AmBev or SABMiller (SBRMY) and its trading at a very cheap level.