Risk, Reward Balanced at AmBev - Analyst Blog

By Zacks Equity Research,

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Companhia de Bebidas Das Americas ( ABV ) akaAmBevis the leading brewer in Brazil, Canada, Argentina, Paraguay, Uruguay and Bolivia with a strong portfolio of globally recognized brands, such as Brahma, Skol, Antartica, Quilmes, Labatt, Pilsen and Paceña. This provides a competitive advantage to the company and reinforces its dominant position in the market.

Moreover, over the years, the company has taken steps to sell higher margin premium products while improving productivity and efficiency of its facilities through initiatives, such as the adoption of a management control system based on zero-based budgeting that avoids unnecessary expenses. This provides a strong upside potential to the company's profitability in the future.

Further, driven by strong top-line performance along with improved margins, AmBev's fourth-quarter 2011 earnings of 56 cents (R$0.98) per share surged 12% from the prior-year period, surpassing the Zacks Consensus Estimate of 55 cents.

Looking ahead in fiscal 2012, AmBev expects strong demand from its key market, Brazil, which drove performance in fiscal 2011. The region's continued strong performance bodes well for AmBev and is expected to bolster its pricing power moving forward. Moreover, the company is anticipating overall volume growth in the range of low to mid-single digit in fiscal 2012.

However, AmBev's business is seasonal in nature and generates a high proportion of sales in Latin America during the fourth quarter due to early summer and year-end festivities. On the other hand, in Canada sales are stronger in the second and third quarters due to the summer season. Consequently, the company is exposed to seasonal risks, if the seasons fail to deliver expected operating performance.

Above all, the company faces intense competition from established rivals in the beer segment, such as Fomento Económico Mexicano S.A.-ADR ( FMX ) and Molson Coors Brewing Company ( TAP ), while in the non-alcoholic segment AmBev competes with The Coca-Cola Company ( KO ). Additionally, the company also encounters competition from local and regional players in the respective countries. Consequently, this may undermine the company's future operating performance.

Given the above pros and cons we reiterate our long-term Neutral recommendation on the stock.Our long-term recommendation on the stock is supported by a Zacks #3 Rank, which implies a short-term Hold rating.

AMBEV-PR ADR ( ABV ): Free Stock Analysis Report
FOMENTO ECO-ADR ( FMX ): Free Stock Analysis Report
COCA COLA CO ( KO ): Free Stock Analysis Report
MOLSON COORS-B ( TAP ): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Stocks: ABV , FMX , KO , TAP

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