AmBev (ABEV, Financial) is a Brazilian brewing company majority owned by Anheuser-Busch InBev (BUD, Financial). It makes up about 35% of AB Inbev’s annual sales and over 50% of its earnings.
AmBev is a sizable company in its own right with a market capitalization of more than $88 billion. It is the largest brewer in Latin America and the fourth-largest worldwide. It owns two of the world's largest beer brands: Brahma and Skol. These beers are basically the Budweiser of South America and make up the bulk of the 200 billion liters of beverages it sells annually.
In Brazil, Argentina, Bolivia, Paraguay and Uruguay, the company holds a virtually insurmountable market position with 65% to 97% market share across these countries. This monopolistic position in its backyard reduces manufacturing complexity, helps the company leverage its fixed-cost base and lowers production costs.
Financially, the company has benefited greatly from its stronghold on South America. Over the last decade, sales are up over 130%, EPS up over 180%, dividends up 130% and total shares down 12%. Unfortunately, as judged in dollars, the company is at a relative standstill. While the company continues to march onward and upward, the Brazilian real has been cut in half.
Risk-reward
From its latest call, Chief Financial Officer Ricardo Rittes said, “In Brazil, our EBITDA was down 31.3% in the quarter, we're now disappointed with our short-term EBITDA performance.”
AmBev gets close to 90% of its revenue from South and Central America. This limited global diversification makes it susceptible to greater economic volatility. That in mind, the industry is one that thrives in good times and bad as long as the prices are affordable. The real question is whether the South American countries will be stronger economically in a decade? If you think they will, which is a view I personally hold, then AmBev will continue to grow. In terms of volume, Brazil is the third-largest beer market in the world, so AmBev’s 64% market share is huge.
Additionally, if AmBev could buy a large craft brewer in the United States, it would help it penetrate the North American market. Beer is such a regional thing for most countries that it will be hard to sell Brahma and Skol outside its home markets, making acquisitions a much more viable option.
Analysis
AmBev earns over $4 billion a year on sales of $14.6 billion, which is good for a gross margin of 63%. While it might not be an appealing trade, I believe at its current price it will survive the coming market correction. When that happens, many other money managers will be rotating their money out of flyers into stable growth companies. AmBev is likely to be one of them. Not to mention the profits it will post in dollar terms should the Brazilian real strengthen against the U.S. dollar. All in all, the margin of safety is extremely high, the micro financial metrics are rock solid and the price is fair.
Disclosure: I do not have a position in any stock mentioned in this article, but may initiate a long position in the next 72 hours.
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