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  • Glenn

Ambev: An emerging market company with a solid ROIC.

Opdateret: 24. feb.

There is much to like about Ambev. It operates in the beer industry, which should perform well if we see prolonged recession. It mainly operates in emerging markets, and stocks in emerging markets have been struggling due to the strength of the dollar. Finally, Ambev has consistently delivered a high ROIC, which, in my opinion, is the most important number to look at when investing. Is now the time to invest in Ambev?

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.

Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and also briefly go through why the company has meaning to me. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.

For full disclosure, I should mention that I do not own any shares of Ambev at the time of writing this analysis. If you would like to view the shares or copy the portfolio, you can find more information on how to do so here. When reading the analysis, you should keep in mind that the numbers I use are in Brazilian Reals. I will write my calculated buy price in U.S. dollars as well and will use today's conversion price. The Brazilian Real has significantly weakened against the U.S. dollar since the start of 2020, and this trend may continue in the future. Hence, I would recommend using the price in Brazilian Real and making the conversion yourself with the day's exchange rate instead of using the U.S. dollar price. If you want to buy shares in Ambev, you can do so through eToro. eToro is a user-friendly platform that allows you to begin your investment journey with as little as $50.

Ambev is a Brazilian brewer located in Sao Paulo and is the largest brewer in Latin America. In addition to beers, they also sell carbonated soft drinks and serve as the official bottler for Pepsi. Brazil is the third-largest beer market in the world, and Ambev holds a market share of 54,9% in the Brazilian beer market. Compared to other analyses I have conducted, finding a moat in Ambev is not difficult. Looking at the 10 most popular beers in Brazil, all three beers in the top three (Skol, Brahma, and Antarctica) are owned by Ambev. Additionally, they also have two others in the top 10 (Bohemia at 8th and Chopp Brahma at 10th). Furthermore, research conducted in 2022 revealed that Skol, Brahma, and Antarctica are all among the top 10 most valuable brands in Brazil, out of a total of 478 brands across 36 different categories. It means that Ambev has a very strong brand moat. It should also be mentioned that they own Guarana Antarctica, which is the second most popular soft drink in Brazil with a market share of 7%. However, they are far behind Coca-Cola, which has a market share of 36,7%.

Their CEO is Jean Jereissati. He first joined the company in 1998 and has held various positions, eventually working his way up to become CEO of Ambev in 2019. He has an MBA from Universidade Ambev, which is the corporate university of Ambev. While it is hard to find much about his management style, I did find some interesting points he has made since becoming CEO. He has stated that the next steps are "alem dos muros da Ambev," which means something like "beyond the walls of Ambev." This indicates his desire to expand outside of Brazil. This is a welcoming move, as Ambev, despite its large market share, has been losing market shares to Heineken. It is difficult to determine if Jean Jereissati is a good CEO based on the limited information I could find about him. However, based on my reading of the conference call transcripts, it is my impression that he has plenty of ideas to propel Ambev forward. I also like that he focuses on delivering a high return on invested capital (ROIC).

I believe that Ambev has a strong brand moat. I'm confident in the management, even with limited information. Now let us investigate the numbers to see if Ambev lives up to our requirements for a strong moat. In case you want an explanation of what the numbers represent, you can refer to "MY STRATEGY" on the website.

The first number we will look into is the return on invested capital, also known as ROIC. We want to see a 10-year history, with all the numbers being above 10% in each year. Ambev has consistently achieved a Return on Invested Capital (ROIC) of over 10% for the past decade, which is highly encouraging. It is concerning that the Return on Invested Capital (ROIC) has recently dropped, and both 2020 and 2021 show lower figures. However, it was during the pandemic where a company like Ambev suffered. ROIC recovered in 2022 and almost reached the pre-pandemic level, which is encouraging. We also received some encouraging words from management regarding Return on Invested Capital (ROIC) in the future. They have expressed their commitment to improving ROIC as one of their primary objectives moving forward. It is no secret that I like management teams that focus on improving ROIC, so I'm encouraged.

The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the percentage growth year over year. Once again, Ambev delivers impressive financial results. Since 2017, the book value + dividend has increased every single year. I'm happy to see numbers like these, as Ambev is growing nicely.

Finally, we will investigate the free cash flow. In short, free cash flow refers to the cash that a company generates after covering its operating expenses and capital expenditures. Levered free cash flow is the amount of money a company has remaining after paying all of its financial obligations. I use the margin to provide a clearer understanding. Free cash flow yield refers to the amount of free cash flow per share that a company is projected to generate in relation to its market value per share. Ambev has consistently generated positive free cash flow over the past 10 years, which is a positive trend. Levered free cash flow margin has mostly been above 20%, which is impressive. However, the levered free cash flow margin reached its lowest point in 10 years in 2022, which is a bit concerning and something I would like to see improve in the future. The free cash flow yield indicates that the stock is cheap, but we will discuss this further in the analysis. Furthermore, management has pointed out that they will focus on value creation drivers moving forward. They specifically mentioned free cash flow and return on invested capital (ROIC) as some of their key drivers for value creation. Hopefully, management can deliver, and we will see an increase in the numbers moving forward.

Another important aspect to consider is the level of debt, and it is crucial to determine whether a business has a manageable debt that can be repaid within a period of 3 years. We do this by dividing the total long-term debt by earnings. After analyzing Ambev's financials, I have determined that the company has a debt-to-earnings ratio of 0,03 years, which is excellent. Hence, debt is certainly not a concern when it comes to Ambev.

Based on my findings so far, I find Ambev intriguing. However, no investment comes without risk and neither does Ambev. One risk is that Ambev is dependent on the Brazilian market. Ambev generates approximately 53% of its revenue from Brazil. Thus, Ambev is highly dependent on the Brazilian market. According to the World Bank the Brazilian GDP growth is expected to slow to 0,8% due to monetary tightening, high inflation, and subdued global demand. These factors are likely to depress private consumption, which could hurt Ambev. Furthermore, according to Ambev's management, the Brazilian tax system is extremely complex, resulting in extensive tax litigation. These tax litigations could result in losses for Ambev in the future. Commodity Prices. Ambev uses various commodities in their daily operations such as aluminum, barley, and sugar. Barley and sugar is currently trading at elevated levels, as both are trading around their highest prices in 10 years. Aluminum prices has dropped lately but is still trading at higher levels than 10 years ago. Management has mentioned that higher input costs pressures from commodities have hurt profitability. Competition. Ambev has mentioned that the beverage industry is becoming more fragmented, complex, and sophisticated. Ambev is now facing competition from several microbreweries. However, their largest competitor is Heineken, which has gained market share in Brazil. Furthermore, Heineken has announced that it will ramp up its investment in Brazil by investing $300 million. This investment is part of an expansion plan for its premium and single malt beer portfolios. If Heineken wins further market share, it could put pressure on Ambev.

There are also some future potentials for Ambev. One interesting growth catalyst is digitalization. Ambev has two different delivery apps. One for consumers called Zé Delivery and one for customers such as small bars etc. called Bees. Zé Delivery currently has 4,6 million active users, and management sees an opportunity in Zé Delivery to unlock new revenue growth engines such as ad sales and increased volume of Ambev products. Bees is another great growth opportunity. Management believes that the potential of Bees is 1-2 million customers and a total addressable market of 650-750 billion. Hence, there are great potential for both these apps and as the apps grow, it will improve margins for Ambev as well. Another growth catalyst is Beyond Beer. Ambev aims to offer more than just beers in order to reach customers who do not consume beer. In the beginning it will be by delivering wine and spirits as well. Both their owns products but also through alliances with other companies like they have made with Pernod Ricard. However, over time, Ambev aims to offer more than just beverages and plans to expand its services to include food delivery as well. CEO Jean Jereissati has explained that during the pandemic, Brazil has become more digital and Ambev wants to take advantage of that by making Ambev an ecosystem. Growing Profitability. Management has mentioned that they want to continue working towards improving ROIC (Return on Invested Capital) and margins, and they believe they are on the right track. Earlier in the analysis, we observed that ROIC improved in 2022. Additionally, in the latest quarter, Ambev successfully enhanced the EBITDA margin across all of their segments. Furthermore, their premium brands are growing at a faster rate than the rest of the portfolio, and premium brands typically have higher profit margins.

All right, we have gone through the numbers, potential and risk regarding Ambev, and now it is time for us to calculate a price for Ambev. To calculate the price, we will need the numbers that I have explained in the "MY STRATEGY" section of the website, as I do not want to go through the entire calculation here. I chose to use an EPS as was in 2022 at 0,91 I chose a Estimated future EPS growth rate of 10 (which is the analyst consensus at Finbox), Estimated future PE 20 (which the double of the growth rate, as the historically PE for Ambev has been higher) and we already have the minimum acceptable return rate on 15 %. Doing the calculations, we come up with the sticker price (some call it fair value or intrinsic value) of 8,92 Brazilian Real and we want to have a margin of safety on 50 % so we will divide it by 2, meaning that we want to buy Ambev at price of 4,46 Brazilian Real (or lower obviously), if we use the Margin of Safety price. With today's conversation rate it would be $0,92.

Our second method for calculating a purchase price is the Ten Cap price, which is also detailed in "MY STRATEGY". To do so, we need some numbers from their financial statements. Please note that all numbers are in millions and in Brazilian Reals. The operating cash flow last year was 20.760. The capital expenditures were 6.340. I tried to look through their annual report to see how much of the capital expenditures were used for maintenance. I couldn't find it, but as a general guideline, you can expect 70% of the capital expenditures to be allocated for maintenance. This means that we will use 4.438 in our calculations. The tax provision was -1.334. We have 15.746,689 outstanding shares. Hence, the calculation will be as follows: (20.760 - 4.438 - 1.334) / 15.746,689 x 10 = 9,52 Brazilian Real ($1,96 with today's conversion rate) in Ten Cap price.

The last calculation is the Payback Time. I also described in "My Strategy." With Ambev's Free Cash Flow Per Share at 1,06 and a growth rate of 10%, if you want to recoup your investment in 8 years, the Payback Time price is 13,28 in Brazilian Real ($2,73 with today's conversation rate).

I believe that Ambev is a good company. They have a strong moat and a great historical return on invested capital (ROIC). There are some concerns, especially in the short term. High commodity prices will affect the profitability of Ambev. The question is how long the prices will remain elevated. There are numerous economic headwinds in Brazil, and it is expected that growth will slow down, potentially impacting sales. A more long-term risk is competition, as their largest competitor, Heineken, is investing in Brazil in order to gain market share. On the other hand, there are also potential opportunities for Ambev. Their delivery apps have great potential, as digitalization in Brazil has just recently begun. Furthermore, management focuses on profitability and has successfully increased ROIC (Return on Invested Capital) and margins in the past year. If they manage to continue to do so, it could reward shareholders. Personally, I appreciate it when management openly acknowledges the significance of improving return on invested capital (ROIC) and profit margins. If you are considering investing in Brazil, you should be prepared to handle the market's volatility. However, I believe that Ambev could be an interesting investment opportunity, especially at a price below the Payback Time price of 13,28 Brazilian Real.

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