There is much to like about Ambev. It operates in the beer industry, which is expected to perform well in most economic environments. 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 Return on Invested Capital (ROIC), which, in my opinion, is the most important metric to consider 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 start by mentioning that at the time of writing this analysis, I do not own any shares in Ambev. If you would like to see the stocks in my portfolio or copy my portfolio, you can do so on eToro, You can find instructions on how to do this here. I don't own any stocks in competitors of Ambev either. Thus, I have no personal stake in Ambev. If you want to purchase shares (or fractional shares) of Ambev, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $100.
The Business
Ambev is a Brazilian brewery located in Sao Paulo and is the largest brewery in Latin America. In addition to beers, they also sell carbonated soft drinks and serve as the official bottler for Pepsi. Ambev operates as a subsidiary of Anheuser-Busch InBev, which owns 62% of Ambev. Ambev is present in 18 countries in the Americas and is the market leader in 10 of these markets. Ambev operates in five segments: Brazil beer, which generates 49% of revenue; Central America and the Caribbean, which generates 17% of revenue; Canada, which generates 13% of revenue; South Latin America, which generates 12% of revenue; and non-alcoholic drinks in Brazil, which generates 9% of revenue. Brazil is the third-largest beer market in the world, and Ambev holds a 68% market share 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 other beers in the top 10 (Bohemia at 8th and Chopp Brahma at 10th). Furthermore, research conducted by Kantar in 2024 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%.
Management
The CEO is Jean Jereissati. He first joined the company in 1998 and has held various positions, eventually working his way up to become the 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 information about his management style, I did come across some interesting points he has made since assuming the role of 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 development, as Ambev, despite its significant market share, has been losing market share to Heineken. It is difficult to determine if Jean Jereissati is a good CEO based on the limited information available 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 appreciate his focus on delivering a high return on invested capital (ROIC).
The Numbers
The first number we will look into is the return on invested capital, also known as ROIC. We require a 10-year history where all figures exceed 10% each year. Ambev has consistently achieved a Return on Invested Capital (ROIC) of over 10% for the past decade, which is highly encouraging. Ambev has not managed to achieve an ROIC above 20% since 2016, but it has consistently delivered a high ROIC in most years. Ambev's Return on Invested Capital (ROIC) decreased during the pandemic in 2020 and 2021, reaching its lowest level in the past ten years. It is encouraging that ROIC has increased in both 2022 and 2023, even though it hasn't reached pre-pandemic levels yet. However, both 2022 and 2023 have been challenging years due to macroeconomic factors. Overall, it is promising that Ambev has consistently achieved a Return on Invested Capital (ROIC) above 15% in the past decade. This is particularly impressive given the industry in which they operate, as Ambev has outperformed companies like Heineken, Anheuser-Busch, and Carlsberg in terms of ROIC.
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 year-over-year percentage growth. Ambev has managed to increase its equity in most years over the past decade, with only three years showing a decrease in equity. Ambev's equity decreased slightly in 2023, but it was a challenging year for most companies. Nonetheless, I would like to see Ambev increase its equity in 2024.
Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. It is not surprising that Ambev has managed to deliver a positive free cash flow every year in the past ten years. It is encouraging that Ambev has managed to deliver its highest free cash flow ever in 2023, despite it being a challenging year for most companies. The levered free cash flow margin hasn't reached previous heights, but it is encouraging that it increased in 2023 compared to the two previous years when it decreased. It should also be noted that Ambev delivers a significantly higher levered free cash flow margin than other large breweries such as Heineken, Anheuser-Busch, and Carlsberg. Free cash flow yield is at its highest level in the past ten years, indicating that the shares are trading at favorable valuations. However, we will revisit this later in the analysis.
Debt
Another important aspect to consider is the level of debt. It is crucial to determine whether a business has 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. Therefore, debt is certainly not a concern when it comes to Ambev. In fact, Ambev has had less than one year of earnings in debt since 2009, which means that it is unlikely that debt will become an issue in the future.
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Risks
Based on my findings so far, I find Ambev intriguing. However, no investment comes without risk, and the same applies to Ambev. One risk is competition. Competition in the beverage industry is expanding, and the market is becoming more fragmented, complex, and sophisticated as consumer preferences and tastes evolve. Competition may divert consumers and customers from Ambev's products. Intense competition in different markets could lead Ambev to lower prices, boost capital investment, increase marketing and other expenses, making it difficult for Ambev to raise prices to offset higher costs. Consequently, this could result in Ambev reducing profit margins or losing market share. Any of the aforementioned factors could have a significant negative impact on Ambev's business, financial status, and operational outcomes. Innovation faces inherent risks, and the new products Ambev introduces may not be successful, while competitors may be able to respond more quickly than Ambev can to emerging trends. Heineken, which has gained market share in Brazil, is Ambev's largest competitor. 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 more market share, it could exert pressure on Ambev.
Fluctuations in exchange rates. Most of Ambev's sales are in Brazilian Real; however, a portion of its debt is denominated in foreign currencies, including U.S. dollars. In addition, a significant portion of Ambev's cost of sales, particularly those associated with packaging materials as well as essential ingredients like sugar, hops, and malt, are denominated in or linked to the U.S. dollar. Accordingly, the recent volatility of the U.S. dollar/real exchange rate has had a notable impact on Ambev's cost structure in recent years. Therefore, any devaluation of the real may increase Ambev's financial expenses and operating costs. The Brazilian currency has devalued frequently, including over the last two decades. There have been significant fluctuations in the exchange rates between the Brazilian currency and the U.S. dollar. For example, prior to the COVID-19 pandemic, the Brazilian real/U.S. dollar exchange rate was stable. The dollar selling exchange rate was BR 4,03 per U.S. dollar as of December 31, 2019. However, by December 31, 2021, the Brazilian real/U.S. dollar exchange rate had reached its lowest point at BR 5,58 per U.S. dollar. The selling exchange rate for the dollar was BR 5,22 per U.S. dollar by the end of 2022. As of December 31, 2023, the Brazilian real/U.S. dollar exchange rate was BR 4,84 per U.S. dollar.
Laws and regulations. There are various laws and regulations that could affect Ambev in Brazil. For instance, the Brazilian Congress approved the consumption tax reform in late 2023. The tax reform eliminates all tax benefits currently applicable to Ambev, which could also negatively impact Ambev's results of operations. Another issue is that companies in the alcoholic beverage and soft drink industries are occasionally subject to class action lawsuits or other legal disputes related to alcohol advertising, alcohol abuse issues, or health effects stemming from the overconsumption of beer, other alcoholic beverages, and soft drinks. Thus, certain beer and other alcoholic beverage producers from Brazil have been involved in class actions and other litigation seeking damages, which will pose an ongoing risk for Ambev.
Reasons to invest
There are also numerous reasons to invest in Ambev. One aspect is digitalization. Ambev has two distinct delivery applications. One app is for consumers, called Zé Delivery, and another is for customers such as small bars, called Bees. Zé Delivery is expanding its coverage and awareness, reaching 5,7 million monthly active users by the end of 2023 and increasing its gross merchandise value by 8%. Management sees an opportunity in Zé Delivery to unlock new revenue growth engines, such as ad sales and increased volume of Ambev products. Bees represent 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 is great potential for both of these apps. As the apps grow, they will improve margins for Ambev as well.
Another growth catalyst is Beyond Beer. Management has high hopes for its beyond beer portfolio. Management has mentioned that they experienced significant growth during the Carnival with the brand's canned famous cocktails. Ambev started this initiative during the 2022 Carnival, introducing Caipirinha in cans. In 2023, they introduced a famous drink in Brazil called Tropical, which is a yellow fruit drink with gin. The introduction of Tropical was a success as the sales of the Tropical cocktail doubled the sales of the Caipirinha cocktail last year. Management has mentioned that the growth for its canned cocktails looks promising, and they are genuinely excited about the journey. Ambev has also introduced a new Guarana Antarctica Zero. Management has mentioned that consumers are saying that there is no difference between Guarana Antarctica regular with sugar and this new Guarana Antarctica with no sugar. Thus, they believe they will be able to acquire new consumers with Guarana Antarctica Zero, and they are very excited about its performance.
International markets. Like other companies, Ambev has faced many challenges in Argentina. However, outside of Argentina, Ambev is performing well. They have seen a recovery in the Dominican Republic, which represents approximately 80% of its Central America and Caribbean markets. The Dominican Republic market delivered a record performance in 2023, and management has mentioned that they see more room for growth in the Dominican Republic, especially through its premium brands because these are still underrepresented in that part of Latin America. Volume-wise, Canada has been a challenging market, but it delivered better cash flow year-over-year in 2023 compared to 2022. Management believes that there is momentum in premiumization in Canada, and they also aim to enhance sales beyond beer. Management also mentioned that they experienced mid-single to mid-teens EBITDA growth in Bolivia, Chile, and Paraguay in 2023, indicating that these markets are performing well.
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Valuation
Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators.
Remember that the numbers used in these calculations are in Brazilian Real. As previously explained in this analysis, the Brazilian Real can fluctuate significantly. Thus, if you are planning to purchase shares in Ambev, remember to check the exchange rate on the day you are making the purchase.
The first calculation is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 0,92, which is from 2023. I have selected a projected future EPS growth rate of 8%. Finbox expects EPS to grow by 8,4% in the next five years. Additionally, I have selected a projected future P/E ratio of 16, which is twice the growth rate. This decision is based on Ambev's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be BR 7,86. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Ambev at a price of BR 3,93 (or lower, obviously) if we use the Margin of Safety price.
The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 24.711, and capital expenditures were 6.004. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 4.202,8 in our calculations. The tax provision was 75. We have 15.740 outstanding shares. Hence, the calculation will be as follows: (24.711 – 4.202,8 + 75) / 15.740 x 10 = BR 13,08 in Ten Cap price.
The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With Ambev's Free Cash Flow Per Share at BR 1,19 and a growth rate of 8%, if you want to recoup your investment in 8 years, the Payback Time price is BR 13,67.
Conclusion
I believe that Ambev is a good company. They have a strong moat and a great historical return on invested capital (ROIC). Ambev also delivers a higher levered free cash flow margin than its competitors, which is another positive sign. We don't have much information about the CEO, but I still have a good impression of him. Ambev operates in a highly competitive industry, where competition will always pose a risk to the company. Especially Heineken is focusing on the Brazilian market, where they have been gaining market share recently. Fluctuations in exchange rates could affect Ambev because some of their debt is in U.S. dollars, and the cost of sales in packaging materials and ingredients are denominated in or linked to the U.S. dollar. Since Ambev generates the majority of its revenue in Brazilian Real, this could impact Ambev's future results, particularly considering the historical volatility of the Brazilian Real. Laws and regulations are also a risk for Ambev. We don't know how the new tax reform in Brazil will affect Ambev, because of the industry that Ambev operates in, they will always be exposed to class actions or other litigation. Ambev is expanding both of its two apps, Zé Delivery and Bees, and management views both apps as excellent growth opportunities for the future. Ambev is also expanding its portfolio beyond beer. Ambev is just getting started on canned cocktails, and the management is very excited about the potential of this market going forward. Furthermore, the launch of Guarana Antarctica Zero is off to a great start, and management believes it will attract new customers to the brand. Finally, Ambev has the opportunity to expand internationally. They are growing in Bolivia, Chile, and Paraguay, while they are experiencing recovery in the Dominican Republic, which is their largest market in Central America and the Caribbean. Ambev is losing market share and experiencing a decrease in volumes in Canada. However, the company managed to deliver improved cash flow year-over-year in 2023 compared to 2022. Thus, if volume picks up again and Ambev manages to regain lost market share, it could significantly contribute to Ambev's profitability in the future. Overall, I like Ambev. If I decide to invest in the beer industry, I would consider buying its shares as long as I can purchase them below the Ten Cap price of 13 Brazilian Real.
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