CCU's third quarter results were slightly above market expectations with revenues up by 13% year-over-year and EBITDA increasing 6%. Besides, thanks to a significantly lower tax rate, the company could achieve a 21% yoy net income growth. I was specially surprised by CCU's volume performance. Organic volumes increased by 7% and pricing was up by 5%. That said, higher costs reduced EBITDA margins by 1.2% to 18.4% - AmBev's EBITDA margins stand above 50%. Even when margins came lower than I had expected, I need to stress CCU's great performance in its main market. Chile's beer, soft drinks, spirits and wine businesses performed better than I had expected, both in terms of volumes and EBITDA growth.
Pricing and M&A
CCU's shares are down by 17% year-to-date and they trade cheaply for a company which owns a de facto monopoly in one of South America's richest countries. The company sells for 8.2 times 2014 EV/EBITDA and 15.7 times P/E. Meanwhile, AmBev sells for 13.7 times 2014 EV/EBITDA and 21 times P/E. AmBev is a better company, but it also trades at a much higher price.
Furthermore, I think CCU is a clear M&A candidate for a bigger company such as AmBev or SABMiller (SBMRY), which is also very much present in Latin America's beverage business – it controls the Colombian beer market, among others. That said, I believe CCU is a more clear acquisition candidate for AmBev since the huge margin gap that exists between the two companies could make an deal - even if it happens at a high premium - extremely attractive for AmBev.
The capacity of AmBev's management to cut costs always goes well beyond analyst's imagination. In addition, the Brazilian company could sell CCU's beer and soft drinks businesses in Argentina and Uruguay in addition to selling CCU's wine and spirits businesses in Chile. AmBev could then focus on beer and soft drinks in the Chilean market, which is CCU's most profitable business.
CCU is simply a great consumer goods company that mostly operates in a very stable country – more than 80% of the company's EBITDA comes from its Chilean operations – and sells at a great price. On top of this, CCU is a clear M&A candidate for a huge company such as AmBev.