Some investment theses are complex. Some are simple. The investment thesis on Brazilian brewing company Ambev SA (ADR) (NYSE:ABEV) is quite simple. Ambev is the largest brewery in Latin America and the fifth largest in the world. ABEV stock draws a ton of its revenue and profits from Brazil.
Naturally, when Brazil entered what ended up being its worst recession in history back in early 2015, Ambev’s numbers took a hit. So did ABEV stock, which went from a $9 high in 2013 to being stuck between $4 and $6 for most of 2015-16.
But now Brazil’s economy is starting show signs of life again. Gradually, low interest rates are sparking investment, and that increased investment is in turn fueling a turnaround throughout the entire economy.
Does this mean mean ABEV stock can soar back to its $9 highs? I think so.
The ABEV Stock Turnaround Is Here
For those unaware, Ambev is a very large brewery behind headline brands like Skol, Brahma, Stella Artois, Bud Light, Modelo Especial, Corona and Budweiser. That is a pretty robust product portfolio that should give investors confidence in the longevity of the company’s business operations.
Consumers in Latin America will almost assuredly always drink Corona and Stella Artois. Long-term operational stability is not at-risk.
But Ambev stock has tripped up recently because of an economic slowdown in the company’s largest market, Brazil. Brazil went through the worst recession in the country’s history in 2015-16. Gross domestic product fell 3.8% in 2015 and 3.6% in 2016, the first time since 1931 that GDP fell in back-to-back years.
The unemployment rate was well above 10% (for comparison, US unemployment peaked at 10% in 2009). The uncovering of a massive government bribery ring led to the impeachment of the president and the jailing of multiple politicians and corporate executives.
Essentially, it was all bad in Brazil. Ambev’s numbers tumbled. Beverage volume growth rates came off the rails, and margins compressed. ABEV stock dropped.
But the economic recovery has finally arrived in Brazil. Brazil’s GDP grew 1.4% in the third quarter of 2017, spurred by a significant uptick in investment. Brazil has chopped interest rates to all-time lows, and now investment and household spending growth is starting to pick up.
Investments in new machinery, facilities and inventories rose 1.6%. More importantly for Ambev stock, consumer spending rose 1.2 percent for the second consecutive quarter, underscoring that there is persistent consumer strength behind this economic recovery.
Analysts are also starting to get bullish about Brazil’s economic rebound prospects. A Central Bank survey of private sector economists found that most analysts believe Brazil’s GDP will grow by nearly 3% in 2018, versus 1% growth in 2017.
All of this is favorable news for Ambev, which has reported a strong comeback in its own numbers. Revenue growth is accelerating upward, driven by resumed growth in Brazil. Gross margins are rebounding. EBITDA margins are rebounding, too.
As Brazil’s economy continues to recover in 2018, Ambev’s numbers will only get better. And Ambev stock will soar.
Bottom Line on ABEV Stock
In the big picture, Ambev stock is a long-term growth story that hit a road-bump with Brazil entering a recession in 2015-16. That recession is finally over, and the Brazilian economy is rebounding. Consequently, the Ambev growth story will resume, and ABEV stock will rebound.
From this perspective, Ambev stock looks like a great way to play the economic rebound in Brazil, which is unfolding with promising pace.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.