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Latin America’s Largest Beverage Firm Could Reward Investors

Latin America’s Largest Beverage Firm Could Reward Investors

Ambev S.A. (NYSE: ABEV), One of Latin America’s largest beverages firms, will see its earnings before interest, taxes, depreciation and amortization in Brazil growing at a faster pace in 2019, according to its Chief Financial Officer.

The Brazilian unit, the largest one in terms of revenues, posted an EBITDA of 11.39 billion reais ($3.04 billion) in 2018, up 3.3 percent from the previous year.

As reported by MorningStar,

“Brazilian brewer Brahma was the first foray into the consumer product manufacturing industry by Jorge Lemann, Marcel Telles, and Carlos Sicupira, the leaders of the private equity group now known as 3G. In 2000, they merged Brahma with Antarctica of Argentina, creating  Ambev.

The company has gone on to roll up brewers throughout Central and South America and holds several monopolylike positions in large markets, including 81% volume share in Argentina, 68% in Brazil, and 61% in Peru.

In part because of the favorable industry structures, and in part because of its 3G heritage, Ambev is a highly profitable business.

The company has a well-entrenched cultural focus on cost management and implemented zero-based budgeting over a decade ago.

Ambev’s largest market is Brazil, which represented 53% of both total beverage net revenue and EBIT in 2018.

Until the current severe recession caused a large contraction in profitability, EBIT margins in Brazil had been at or above 45% since 2010, among the highest in the global beer industry, and while the entry of Heineken (HEINY) to Brazil may limit margin potential, we expect margins to rebound to 38% when the macroeconomic picture improves.”

Some analysts believe the earnings outlook for this stock is improving which could potentially reward patient investors.

Despite economic problems in several countries, such as Argentina, the company has continued to grow at a decent pace, with revenues up 5.3% in the latest quarter.

Bridgewater Associates, the world’s largest hedge fund, recently indicated that Brazil could have the strongest growth this year. If this prediction is accurate, ABEV stock could be one of the first to benefit.

The company’s products are present in 19 countries, there are thirty-two breweries and two malting plants in Brazil, thirty drinks brands, thirty-thousand employees in Brazil, and one-hundred direct distribution centers.

The stock is currently trading above $4 and could deliver a 41% gain.

ABEV daily chart

ABEV should be considered a buy if recent momentum continues.

Look for an entry at $4.67 with a price target of at least $6.60 based on the pattern in the chart.