Ambev: An emerging market company with a solid ROIC.
Opdateret: 1. mar.
If you regularly read my posts, you will probably already know that I'm currently looking into companies in emerging markets. You will probably also know that I like companies that deliver a high return on invested capital. Ambev fits the bill, but the question is if it is time to buy the stock.
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 own Ambev at the time of writing this analysis. Ambev is 1,03 % of the portfolio that you can copy. If you would like to copy the portfolio, you can read more about it 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 conversation price. The Brazilian Real has dramatically weakened against the U.S. dollar since the beginning of 2020, which might change moving forward. Hence, I would recommend you using the price in Brazilian Real and make the conversion yourself with the day's conversation rate instead of using the U.S. dollar price.
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). Furthermore, research made in 2021 showed that Skol, Brahma, and Antarctica are all in top 10 of the most valuable brands in Brazil among 478 brands in 36 different categories. It means that Ambev have a very strong brand moat. It should 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 an 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 has 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. It is difficult to determine that Jean Jereissati is a good CEO based on the little info I could find about him. However, from what I have read in the conference call transcripts, it is my impression that he has plenty of ideas to move Ambev forward. I also like that he focusses on delivering a high ROIC.
I believe that Ambev has a strong brand moat. I'm positive when it comes to the management, even though we do not have much 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 about what the 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 years. Ambev has delivered a ROIC of more than 10 % every single year in the last 10 years, which is very encouraging. It is a bit concerning that ROIC has dropped lately and that both 2020 and 2021 are in the lower end. However, it was during the pandemic, where a company like Ambev suffers. We also had some encouraging words from management regarding ROIC moving forward, as they have stated that one of their main goals is to improve their ROIC moving forward. It is no secret that I like managements that focuses on improving ROIC, so I'm encouraged.
The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. Once again Ambev delivers some good numbers. There are a few years where the book value + dividend decreased a bit but since 2017 the numbers have increased every single year. I'm happy to see numbers like these as Ambev is growing nicely.
Finally, we investigate the free cash flow. In short, free cash flow is the cash a company generates after it has paid for operating expenses and capital expenditures. Levered free cash flow is the amount of money a company has left remaining after paying all of its financial obligations, I use the margin for it to make more sense. Free cash flow yield is the free cash flow per share a company is expected to earn against its market value per share. The free cash flow has been a bit mixed over the years but looking at the leveraged free cash flow margin, the numbers are impressing. The free cash flow yield indicates the the stock is cheap but we get back to that later in the analysis. Furthermore, management has pointed out that they have focus on value creation drivers moving forward, and specifically mentioned free cash flow and ROIC as some of their value creation drivers. Hopefully management can deliver and we will see the numbers increase moving forward.
Another important thing to investigate 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 earnings. Doing the calculation on Ambev, I can see that Ambev has 0,02 years earnings in debt, which is fantastic. Hence, debt is certainly not a concern when it comes to Ambev.
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% in 2020. 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. It was also mentioned in the latest conference call as the prices on barley and aluminum are significantly up, which hurts profits. Furthermore, the price on diesel also hurt Ambev as delivery gets more expensive. 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. And finally, we have inflation running wild in Brazil as it has topped 12 % year over year. All these things could be a blow for Ambev.
There are also some future potentials 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. In the conference call in the first quarter of 2022, management mentioned that they still haven't recovered to pre-pandemic levels. And still sees it as an opportunity to grow. Another 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 is growing steadily quarter over quarter and reached a record high monthly active users of 4,9 million in the last quarter in 2022. Furthermore, management sees opportunity in Zé Delivery to unlock new revenue growth engines such as ad sales, increased volume of Ambev products. Bees is another great growth opportunity. By the end of December 2021 Bees had 370.000 customers and is a 1 billion market. 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. Finally, we have Beyond Beer. Ambev wants to deliver more than beers to reach customers that don't drink 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, with time Ambev wants to deliver more than just drinks and wants to expand to deliver food 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.
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 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 an EPS as it is now at 0,85. I chose a Estimated future EPS growth rate of 9 (which is the analyst consensus at Finbox), Estimated future PE 18 (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 7,62 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 3,81 Brazilian Real (or lower obviously), if we use the Margin of Safety price. With today's conversation rate it would be $0,71.
Our second way to calculate a buy price is the TEN CAP price, which is also explained at "MY STRATEGY". 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 22.901,3. The Capital Expenditures was 7.677,1. I tried to look through their annual report to see, how much of the capital expenditures were used on maintenance. I couldn't 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 5.373,97 in our further calculations. The Tax Provision was 636,6. We have 15.736,9 outstanding shares. Hence, the calculation will be like this: (22.901,3 - 5.373,97+ 636,6) / 15.736,9 x 10 = 11,54 ($2,16 with today's conversation rate) 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 1 and a growth rate of 9 %, if you want your purchase back in 8 years, the PAYBACK TIME price is 12,06 in Brazilian Real ($2,25 with today's conversation rate).
I believe that Ambev is a good company. They have a strong moat and a great historical ROIC. There are some concerns, especially short-term. High commodity prices will affect the profitability of Ambev, and the question is how long the prices will be elevated. There are a lot of economic headwinds in Brazil as inflation is running wild, which could result in less sales. On the other hand, there are great potential for Ambev as Brazil is getting more digital. Both of their apps are growing quarter over quarter, which should improve margins and profitability over time. Ambev could benefit further from this if they turn into a digital ecosystem that sells more than beers and other drinks. Personally, I also like that management several times has stressed the importance of a high ROIC. You would need to be able to stomach volatility, but I wouldn't worry if I can buy Ambev at the PAYBACK TIME price of 12,06 Brazilian Real.
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