AmBev drinks others under the table

Increasing volume is helping AmBev's net sales grow, but the cost of raw materials and slowing growth in Brazil are new concerns.

By Jim J. Jubak Mar 4, 2011 7:07PM
Jim JubakOh, Canada!

Maybe AmBev (ABV) should challenge Canadians to see if they can outdrink the company’s Brazilian customers.

AmBev announced on March 3 that organic sales volume grew in Brazil by 3.6% in the just-completed fourth quarter of 2010, and in southern Latin America by 2.6% -- but fell by 5.3% in Canada. (If you own this stock, remember to ask for Labatt in Canada.)

Thanks to volume growth and price increases, net sales climbed by 12%.

Sales in Canada have been a problem for quarters now, so this most recent decline isn’t a new problem on the downside. Neither are rising costs for raw materials, such as sugar (or actually the rising cost of hedges against higher sugar prices).
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What is new is the worry that slowing growth in Brazil, as the government fights inflation, will cut into beer sales.

For 2011, "there are some pros and cons," chief executive João Castro Neves told analysts on March 3." A clear pro for 2011 is the low unemployment figure -- the lowest we’ve ever had in Brazil."

But that’s balanced by a con, since the government has decided to deliver a smaller-than-expected increase to the minimum wage in 2011.

Under these circumstances, the company’s ability to increase EBITDA (earnings before interest, taxes, depreciation, and amortization) margins by 3.1 percentage points, to 51.3%, was pretty impressive.

The company generated 11.5 billion reais (about $7 billion) in cash from operations for 2010. The company is required to pay out 35% of its annual net income in dividends. 

On Feb. 28, the company announced that it would pay out a 1.8 billion reais dividend (about 40 cents a share) on March 22.

The stock has sold off -- along with the rest of the Brazilian market -- so that it now trades at just 21.6 times trailing 12-month earnings. Compare that to 2010, when the price-to-earnings ratio was 23.6. (The current average for the brewing industry is 27.6.)

As of March 4, I’m raising my target price on these shares to $37, from my previous target of $36, in anticipation of the turning emerging-market tide toward the end of 2011. The stock traded around $28 on Friday. The stock is currently a member of my Jubak’s Picks medium-term portfolio.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. The fund did not own shares of AmBev as of the end of January. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. 

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