On the Dip, Ambev Stock Looks Attractive but Risky

It would appear there’s a strong “buy the dip” case for Ambev (NYSE:ABEV) stock at the moment. Ambev stock has pulled back some 20% in barely a month on almost no news.

Ambev Stock Looks Attractive - and Risky - On the Dip

Reports in Brazilian media this month cited testimony that alleged the company was involved in the country’s long-running corruption scandal, often referred to as Operation Car Wash. Ambev has denied any involvement. The company also pointed out that beverage taxes spiked in 2015 — an increase the bribes ostensibly were meant to prevent.

Meanwhile, Ambev actually posted a blowout second quarter report last month, with Ambev stock touching a 52-week high on the news. A month later, the stock seems on track to touch a 2019 low. With a reported dividend yield of 5.5%, a more reasonable valuation, and potential growth in Latin America and Canada, the decline seems to present an opportunity.

That may be the case. ABEV is cheaper. Growth has been more impressive than it appears. But there are risks here, too — risks highlighted by the recent decline. Investors should take a look at buying the dip in ABEV stock. They should also understand that the declines can continue.

The Case for Ambev Stock

There’s a lot to like when it comes to Ambev stock. Valuation isn’t necessarily cheap: the stock trades at 23.6x trailing twelve-month adjusted EPS. But EV/EBITDA, below 13x, is more attractive.

In the context of the industry, those multiples are relatively benign. Anheuser-Busch InBev (NYSE:BUD), who owns over 60% of Ambev, trades at about 12x EV/EBITDA with a much weaker balance sheet. (A-B had to cut its dividend to manage its debt. Ambev has net cash.) Boston Beer (NYSE:SAM) trades at a massive premium to ABEV stock. Constellation Brands (NYSE:STZ,NYSE:STZ.B) trades at 21x forward earnings despite weaker growth of late.

Investors usually are willing to pay a premium for beer or spirits companies because growth can last for decades. For a company like Ambev, whose leading brands in Brazil include Skol, Brahma, and Antarctica, that can be the case.

Meanwhile, recent performance looks solid. Earnings took a tumble in 2016, owing to the aforementioned tax hike in Brazil. But normalized EBITDA, as the company terms it, increased nearly 9% year-over-year on an organic basis in the first half despite a big jump in input costs. That follows a 14% increase in 2018 on the same basis.

To top it off, ABEV stock provides a solid dividend. Like many overseas companies, Ambev doesn’t give a consistent payout. (In fact, it hasn’t yet declared a dividend for this year, which is unusual.) But the 2018 payout totaled 12.6 cents – suggesting a 2.9% yield.

So there’s a nice combination of growth, value, and income — at a cheaper price to boot.

The Risks to ABEV Stock

That said, the risks here need to be monitored as well. It’s tempting to argue that the 20% decline from post-earnings highs came on no news, bribery allegations aside. But that doesn’t mean they came for no reason.

Over half of the company’s profit comes from Brazil. (About 10% comes from Canada, where the company sells Lablatt beer. The remainder comes from elsewhere in Latin America and the Caribbean.) And investors have quickly soured on Brazilian stocks. The iShares MSCI Brazil Capped ETF (NYSEARCA:EWZ) has declined 14% in the past month.

A weaker Brazilian real is an issue. But there is real emerging market risk here as well, with Argentina another sore spot. And so the fact that ABEV stock is cheaper than U.S. beer producers may not mean the stock is cheap. It probably should trade at a discount, given macroeconomic uncertainty and higher volatility.

The other issue is the overall health of beer. Certainly, U.S. trends don’t look particularly positive. Even SAM stock – which has gained over 80% – has benefited from non-beer growth.

At the moment, the overall beer market in Brazil, at least, appears to be growing. But craft brewers are making inroads. The former ‘set it and forget it’ nature of buying beer stocks might be over — as witnessed by the huge plunge in BUD stock last year.

Both risks have hit ABEV stock hard in recent years. The case for ABEV wasn’t terribly different last year at $7, or above $6 back in 2014. Returns for most shareholders, dividends included, have been negative over the past five years. Maybe this time is different; maybe ABEV stock finally is too cheap. Investors have said that before.

As of this writing, Vince Martin has no positions in any securities mentioned.

Article printed from InvestorPlace Media, https://investorplace.com/2019/08/ambev-stock-looks-attractive-risky-dip/.

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