Ambev SA (ABEV) 41% Upside

Business Description

Ambev SA is a Brazilian company traded on the New York Stock Exchange. They produce, distribute, and sell beer, carbonated soft drinks, other non-alcoholic beverages, malt, and food products in the Americas. They are the largest brewer in Latin America and you are probably already familiar with most of their products. Certain products such as Budweiser and Bud Light are not part of their brand, but they have exclusive rights to distribute these products.

Opportunity

In the beginning of 2020, fears of COVID-19 sent stocks crashing. ABEV's stock price went from $4.75 to $2. However, concerns over COVID-19 never materialized for ABEV and they actually produced record revenue as people stayed home and drank more beer. In 2020, they produced R$58.2 billion BRL (Brazilian Real) in net revenue while in 2019 they produced R$52.6 billion BRL, a 10.6% increase. According to ABEV's Q3 2021 results, they have already produced R$50.8 billion BRL of net revenue in the last 9 months. this does not include their Q4 net revenue which is historically their best quarter. In the graph below, we see how their net revenue spikes during Q4.

Risks

Although their net revenue has been increasing, so has their cost of sales. A large portion of their cost of sales is made up of raw materials such as aluminum, sugar, corn, and wheat. Below is a table showing the volatility in 2020 prices of the principal commodities ABEV purchases.

Additionally, the BRL has weakened significantly against the USD. This means that the BRL can purchase less with it's currency. When we combine rising commodity prices with a weakening BRL, we see a significant increase in cost of sales. In 2020, cost of sales accounted for 46% of revenue while in 2019 it accounted for 41%. In the chart below, we see cost of sales increasing as a % of net revenue. In 2021, cost of sales is growing even larger than in 2020.

Valuation

In general, ABEV is a very stable company with predictable earnings. They have grown net revenue every single year since 2013 (as far back as I checked) yet cost of sales has held their net income steady. They may not be a growth company, but they have a tremendous amount of value at it's current price of $2.75 (as of 2/2/22). ABEV should have no problem producing R$0.71 BRL EPS (ABEV's 2020 EPS) translating to about $0.13 USD EPS (using $0.18 USD/BRL conversion rate). Given it's historical PE ranges, I believe ABEV is worth at least $3.90, a 41% potential upside.

Potential Catalysts Three major catalysts can push ABEV's stock price: positive Q4 results, commodity prices decreasing, and BRL strengthening against USD. ABEV should be releasing their annual results by the end of March 2022. We should see solid net revenue growth, but also be ready for high cost of sales. Secondly, if commodity prices fall, it will directly translate to lower cost of sales and higher earnings. Lastly, if the BRL strengthens against the USD, it will also translate to lower cost of sales and higher earnings.

Long term Timeframe

It is important to view stocks as ownership of a company rather than a means to a quick profit. My mindset when entering a position is to hold for the long term, but if the market decides to reward me in a few weeks or months, I will gladly take the offer.

Disclosures

I am not a financial advisor, all valuations are my personal opinion. I do own shares of ABEV. Hopefully that covers everything. Invest at your own risk.

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