AMBEV (NYSE:ABEV) does not get much attention, even though it is one of Brazil’s largest companies. Consider that it has a market cap of about $71 billion.
Source: Shutterstock Then again, Ambev stock has been mostly a loser. During the past five years, the average return has been an awful -5.54%. And for the past 12 months, the return on Ambev stock has come to -36.85%.
But hey, could there be a value play here? Maybe now is the time to think of an investment? Perhaps so. And to see why, let’s get some background on the company.
What Does Ambev Do?
The origins of ABEV go back to the late 1990s when Brazilian brewer, Brahma, merged with Antarctica of Argentina. The merger was led by dealmakers Jorge Lemann, Marcel Telles, and Carlos Sicupira, the operators of private equity powerhouse 3G Capital. They have since been aggressive with their deal-making, scooping up a myriad of beer and beverage companies.
The result is that ABEV controls dominant positions in Brazil, Argentina and Peru. The company also has an extensive portfolio of brands like Budweiser, Stella Artois, Beck’s, Skol, Michelob Ultra, and Hoegaarden. They cover all the categories, from the high-end, premium and mainstream.
As for 3G Capital, the firm has a disciplined approach to management, called zero-based budgeting. This involves justifying additional costs for each quarter. All in all, it’s been an effective way to improve EBITDA.
However, 3G’s strategy has come under scrutiny. The reason? One of its high-profile investments, in Kraft Heinz Co (NASDAQ:KHC), imploded earlier this year. The company, which also had the backing of Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B), reported a $15 billion write-down of various brands. There was also weak guidance and a significant reduction in the dividend. For the most part, Wall Street believes that the problems are due in part to overzealous cost-cutting.
But regarding Ambev stock, there are no signs of chronic problems. Consider that the company has continued to grow at a decent pace – with revenues up 5.3% in the latest quarter — despite economic problems in several countries, such as Argentina.
OK then, but isn’t beer consumption declining? Yes, this is true in the US market, especially with younger people. They are looking at alternatives, like wines, cocktails and even hemp-based offerings. This is why companies like Anheuser Busch (NYSE:BUD) have suffered steep declines in their stock prices.
Yet, it’s important to keep in mind that the beer market in the US is also at saturation levels. This is far from the case in South America, where per capita beer consumption is more than 10 liters below the average for the world (according to research from Global Data). All in all, there its lots of runway for growth.
Bottom Line On Ambev Stock
The fortunes of ABEV stock are mostly tied to Brazil, which represents a majority of revenues. And, interestingly enough, this could be good news.
Why so? Well, look at Bridgewater Associates, which is the world’s largest hedge fund. The firm recently indicated that Brazil could have the strongest growth this year.
No doubt, if this prediction pans out, ABEV stock should get a nice lift. (Note that revenues are heavily dependent on GDP growth.)
In the meantime, the valuation on ABEV stock is reasonable, with an 18 price-to-earnings ratio and a dividend yield of 5.28%. In other words, for investors looking for a play in the emerging markets, this looks like an interesting choice.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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