Last week I opened a position in Ambev. Let me explain why I did so.
Opdateret: 3. maj
If you regularly read my posts, you will probably already know that I'm currently looking into companies in emerging markets. One company that I have recently opened a small position in is Ambev. In this analysis I will explain why I have done so, and why I might increase it.
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.
I continue to look for companies in emerging markets, as I believe that they will benefit from a weakening of the dollar, besides that I'm also currently looking into companies that I believe will perform well in a post pandemic world. I have already invested in breweries through my Danish broker, and have positions in Carlsberg and small brewer called Alefarm. Hence, it was natural to look for breweries in emerging markets. I first looked into Cia Cervecerias unidas, as it is a company I have quite a good knowledge of, as I have been to Chile several times. However, looking into the numbers, I quickly turned my attention to Ambev. I do know that Ambev has merged Anheuser-Busch but I will only focus on Ambev in this analysis. Keep in mind that I use Brazilian Reals in some of the calculations that I do. I will l convert that into dollars with today's rate.
Ambev is a Brazilian brewer that is located in Sao Paulo, and is the largest brewer in Latin America, besides beers they also sell carbonated soft drinks. You might not know it but Brazil is the third largest beer market in the world, and Ambev has a market share of 54,9 % in the Brazilian beer market. Compared to other analyses I have made, finding a moat in Ambev isn't a hard thing to do. Looking at the 10 most popular beers in Brazil, all three beers in top three (Skol, Brahma and Antarctica) are owned by Ambev, while they also have two others in top 10 (Bohemia at 8th and Chopp Brahma at 10th). It means that Ambev have a very strong brand moat. It should be also be mentioned that they own Guarana Antarctica that is the 2nd most popular soft drink in Brazil with a market share of 7 %, even though they are far behind Coca-Cola that has a market share of 36,7 %.
Their CEO is Jean Jereissati. He first joined the company in 1998 and have held various positions and eventually worked his way to become CEO of Ambev in 2019. He has a MBA from Universidade Ambev, which is a corporate university of Ambev. While it is hard to find much about is management style, I did find some interesting points he has made once he became CEO. He have stated that the next steps are "alem dos muros da Ambev" , which means something like beyond the walls of Ambev, meaning that he wants to expand outside of Brazil, which is welcoming as Ambrev, despite their large market share, has lost market shares to Heineken. Even though it is difficult to determine that Jean Jereissati is a good CEO based on the little info I could find about him, the numbers they just published in Q4 suggests that he has been doing a good job.
We have determined that Ambev has a strong brand moat. We are slightly positive about the management, even though we do not have much information. Now let us look into the big five numbers in order to see, if Ambev does live up to our requirements for a strong moat. In case you want an explanation about what the big five numbers are, you can have a look at "MY STRATEGY" on the website.
The first number we will look into is the return on investment capital, also known as ROIC. We want to see 10 years of history and we want the numbers to be above 10 % in all of the benchmarks. The ROIC in all benchmarks are fantastic, and is something that you would love to see when you are investing in a company. In my opinion ROIC is by far the most important number, and it is very encouraging to look at the numbers of Ambev.
The next numbers we will look into are the Sales Growth Rates. Ideally the numbers should be above 10% in each benchmark and increasing. Ouch, these numbers are bad. While the Sales Growth rate is not the most important numbers, these are very underwhelming.
The next numbers are the EPS Growth Rates. As with all other growth rates we want the numbers to be above 10 % in all benchmarks. Once again you see very underwhelming numbers, and even though you see a positive trend in the latest benchmark, it is hardly something that will make you happy.
The Equity Growth Rate is the most important of the growth rates, as it shows how much the company has left if they sold everything and paid all debt. As you can see their equity growth rate is solid, and especially in the later benchmarks they look fantastic.
Finally we look into the Cash Growth Rates. Once again the numbers are unsatisfying. Not much to say about these numbers other than they are indeed underwhelming.
To sum up the five numbers. The most important number will always be the ROIC, and the numbers are great. You do not find companies with such great ROIC numbers, the ROIC of Ambev is better than it is for companies such as Amazon and Netflix. The most important of the growth rates is the Equity Growth Rate, where Ambev show very solid numbers and the latest benchmarks show great numbers. However, you can group the Sales Growth Rate, the EPS Growth Rate and the Cash Growth Rate together, and they are indeed underwhelming, which is somewhat of a concern. Nevertheless, the positivity of the ROIC and Equity Growth Rate out weights the negativity of the other growth rates for me.
Another important thing to look into is debt, and we want to see if a business has a reasonable debt that can be paid off within 3 years. We do so by dividing the total long-term debt by current cash flow. Doing the calculation on Ambev, I can see that Ambev has 0,06 years earnings in debt, which is fantastic.
Based on my findings so far, I find Ambev intriguing. However, no company comes without risk and neither does Ambev. One thing that is quite concerning, and that I mentioned previously, is that they have been losing market shares in Brazil. They have gone from a market share in 68,2% in 2014 to 54,9% now. The competition is mainly from Heineken but also for microbreweries, which is a trend we see around the world as well. Another risk is one that Ambev mentioned in their latest earnings report, commodity prices. You might have seen me writing about commodity prices in other posts and how I believe they will rise in 2021 (due to a bad harvest in the Southern Hemisphere), which is obviously a bad thing for a company such as Ambev. Another risk for Ambev is the Brazilian macro environment. Brazil could be significantly hurt by the pandemic, which could slow down the economic recovery (Brazil is still Ambev's largest market). At the same time it could decrease the value of the Brazilian Real, which would be another blow to Ambev (even though I believe that the Brazilian Real will rise against the dollar in 2021, you never know).
There are also some positives in the future for Ambev. The most obvious one is that once the pandemic is over, restaurants and night life will open again, which would be positive for a company such as Ambev. Another thing I believe will be positive for Ambev in the future is the further development of Zé Delivery. It is a delivery app owned by Ambev that delivers all sorts of products, such as cold beers (but also snacks, glasses, ice etc) at reasonable prices within 35 minutes, and it has grown steadily throughout the year. In Q4 of 2020 alone, it delivered 27 million orders, which is the equivalent of one order per second. In 2021 Ambev will continue to improve Zé Delivery by increasing penetration, retention, frequency and assortment. Another thing which is a bit more speculative from my part is their very ambitious sustainability goals. By the end of 2020 they neutralized 33,3 % of the plastic pollution of their packaging, all of their breweries in Chile and Argentina are run on renewable energy, while 100% of their distribution centers in Brazil is operated by solar energy. By 2025 all of their electricity must come from renewable sources, all of their farmers must develop sustainable farming and all of their packaging must be returnable packaging, while they also have plans for sustainable water resources. I mention this, as it might be reason to include the stock in various ETF's that focus on sustainability, which could increase the price of the stock.
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. In order to calculate 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 whole calculation here. I chose to use a EPS as it is was in 2020 at 0,19. I chose a Estimated future EPS growth rate of 15 (which is the highest I use but it is still lower than the consensus analysis growth rate, and their Q4 growth), Estimated future PE 30 (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 by using the formula I described in "MY STRATEGY" we come up with the sticker price (some call it fair value or intrinsic value) of $5,70, 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 $2,85 (or lower obviously), if we use the Margin of Safety price.
Our second way to calculate a buy price is the TEN CAP price, which is also explained at "MY STRATEGY". In order to do so, we need some numbers from their financial statements, keep in mind that all numbers are in millions and in Brazilian Reals. The operating Cash Flow last year was 18.381,30 The Capital Expenditures was 4.838,60. I tried to look through their annual report to see, how much of the capital expenditures were used on maintenance. I wasn't able to find it though, so as a rule of thumb, you expect 70 % of the capital expenditures to be used on maintenance, meaning we will use 3.387,02 in our further calculations. The Tax Provision was 754,70. We have 15730 outstanding shares. Hence, the calculation will be like this: (18.281,30 - 3.387,02 + 754,70) / 15.730 x 10 = 10,01 (1,79 US dollars) in TEN CAP price.
The last calculation is the PAYBACK TIME. I also described in "MY STRATEGY". With the Free Cash Flow Per Share at 0,23 and a growth rate of 15 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $3,63.
I do believe that Ambev is a good company. They have a strong moat and a great historical ROIC. There are some concerns about the company, such as little knowledge about the management, some bad growth rates and some risks they are facing in the near future. However, I also think they can be profitable in the future, as they have good potential. You will need to do some monitoring when investing in Ambev. I already bought some shares once it came below the Margin of Safety price at $2,85, as then then traded at a 50 % discount on two out of three calculations. I plan to increase my current position but I don't want to make it too large part of my portfolio due to the uncertainty.
My personal goal with investing is financial freedom. It also means that to obtain that, I do different things to build my wealth. If you have some extra hours to spare each month, you can turn a few hours a week into a substantial amount of money in a few years. If you are interested to know how to do it, you can read this post.
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