We are downgrading our long-term recommendation on Companhia de Bebidas Das Americas, or AmBev (ABV) to Underperform, citing a negative impact on the company's future financial performance due to the Brazilian government's recent decision to raise taxes on beer and soft drinks.
To shield against the higher taxes, the company might inflate its prices in an effort to somewhat offset the negative impact, which might result in lower volumes. As a result, the net income may be pulled down.
The company reported a lower-than-expected first-quarter 2012 earnings of $0.40 per share. Also, intense competition from global and regional players coupled with seasonal nature of business may undermine the company's future operating performance.
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