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Why a Gamble on AmBev Stock Makes Sense

After a wild ride last year, the alcoholic-beverage industry appears set for a comeback. Within this group, the biggest standout in recent days is AmBev (NYSE:ABEV). The Latin American arm of adult-beverage giant Anheuser Busch (NYSE:BUD), ABEV stock has taken stakeholders to opposite ends of the emotional spectrum.

In 2018, AmBev stock absorbed a devastating 38% loss in the markets. Headquartered in Brazil, the company faced challenges associated with a politically volatile environment. Moreover, management only brought to the table ho-hum earnings results. Although three out of the four quarters met per-share profitability expectations, there were no positive surprises.

However, that changed dramatically for the most recent second quarter. According to Refinitiv, ABEV delivered $693.4 million in net income, easily beating Wall Street’s consensus target of $606.58 million. In the year-ago quarter, the beverage maker mustered up only $611 million.

Furthermore, ABEV rang up $3.15 billion in top-line sales. This was a noticeable improvement over the $3.05 billion in revenue in Q2 2018.

But the biggest driving force for AmBev stock is the narrative behind the numbers. For instance, the underlying company raised prices in July to combat higher costs within the alcohol industry. Although sales volume stayed relatively flat, net income increased. That suggests robust demand for the ABEV brand.

In addition, the company successfully pushed their premium brands onto the marketplace, driving up profitability margins. Ultimately, beer volume in Brazil increased 2.9% on a year-over-year basis. Central America and the Caribbean experienced a 5.7% volume lift.

That said, AmBev stock has been inside a long-term bearish trend channel since early 2013. Can prospective buyers really trust this rally?

Different Fundamental Environment Supports AmBev Stock

Anyone who has working eyes can appreciate why investors are hesitant to jump aboard ABEV stock. With so much volatility in just a short period of time, the equity doesn’t exactly inspire confidence.

But before you dismiss AmBev stock, we should also note the differing context between 2018 and the year so far. A major reason why shares fell so sharply last year was the same one that sank broader markets: uncertainty.

After all, 2018 was when the Trump administration first became serious about imposing tariffs on imported goods from China. He later followed through on his threats, leading to a series of retaliatory sanctions. And while this doesn’t affect Latin American markets directly, a weaker China weakens the global economy. As largely commodity exporters, Latin American jobs depend on healthy commerce.

More specifically to the region, 2018 was also the year of major elections and political turmoil. At times, Latin America looked like a basket case, scaring off investment dollars.

Of course, countries south of our border have some ways to go. Still, evidence exists that the region is making substantive headway. For example, economic experts predict that the GDP of Latin America will improve next year to 2.6% from 2%. Countries most likely to be responsible for the bump up are Mexico, Brazil, Colombia, and Argentina.

This forecast supports the narrative underlining the Q2 earnings report for AmBev. With slow but steady growth, Latin American consumers have more discretionary income. As a result, they’re able to pay the higher prices for their choice beverages. Additionally, many are willing to fork the funds for ABEV’s premium labels.

Demographics Also Help ABEV Stock

Another point to consider if you’re on the fence regarding AmBev stock is demographics. Specifically, Latin America and the Caribbean feature desirable population pyramids; that is, their nations have significantly more young people than old.

Naturally, a young-skewing population benefits companies like ABEV because they can cultivate long-term consumer relationships. Let’s face it: there’s a reason why the 18-to-40 demographic is a goldmine for advertisers. In the same vein, alcoholic-beverage makers have more opportunities to sell their products to an impressionable crowd.

Second, Latin America traditionally features spirits and wine. For instance, Mexican alcohol is synonymous with tequila like vodka is to Russia. But that just gives much broader market share for breweries to steal. And that’s exactly what’s been happening.

According to BBC News, small craft breweries are opening across the region. Even during periods of economic challenges, beer connoisseurs still find ways to imbibe.

Now I don’t think it’s a stretch to assume that Latin American youth are leading this charge. Further, positive economic developments should help give more of these youth jobs and enhanced discretionary income. Over the long run, that should bolster the bullish argument for AmBev stock.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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