Intuitively and scientifically, beverage maker and distributor Ambev (NYSE:ABEV) can be a frustrating investment. On the one hand, everybody loves beer. Many a problem, even across borders and customs, can be solved by sharing a cold one. Yet agonizingly, Ambev stock is one of the worst performers of this year, down over 27%.
Before we dive into the headwinds pressuring shares, it’s worth considering the bullish angle. For Ambev stock, the overriding catalyst is the burgeoning Latin American market. As Cesar Manent, partner and co-founder of 5th Street Advisors stated, “…Latin America has two fabulous demographic attributes that developed countries can only dream of: significant population growth and a growing middle class.”
Indeed, the region has a very favorable population pyramid. Basically, the country has more young people than old. As I wrote last July:
“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.”
Furthermore, with the increased spending power of this prime demographic, their discretionary spending should move up a notch, both in scale and substance. And that’s exactly what happened, with BBC.com reporting rising interest in Latin America for craft beer.
More money and a willingness to experiment with premium products? In theory, this is a huge positive for Ambev stock.
Unfortunately, though, Wall Street took a different interpretation on ABEV. Frankly, I can’t say that they’re entirely wrong in their assessment.
Ambev Stock May Be Weaker than Anticipated
Many analysts like Manent above have cited favorable Latin American demographics as a broader catalyst for regional economic growth. However, this oft-told narrative may be losing its luster.
According to a report from McKinsey Global Institute, Latin America’s contextual growth story isn’t nearly as charming as many believe. The study asserts that the region’s productivity has stemmed largely from nominal brute force. It states:
“Almost three-quarters of Latin America’s growth came from expanding the number of workers rather than through productivity gains, which averaged just 0.8 percent annually, or one-fourth the productivity gains in emerging-market peers.”
With fertility rates ticking down, the study’s authors note that Latin America must substantively increase productivity or risk falling behind to other regions. Thus, the demographic argument for Ambev stock is not quite ironclad.
Second, despite reports to the contrary, beer is simply not a popular alcoholic beverage down south. According to a Statista forecast, beer consumption in Latin America has a compound annual growth rate (CAGR) of 2.65% between 2015 and 2020. That sounds great, especially compared to North America’s 1.25%.
However, Africa and Asia have CAGRs of 5.25% and 3.05%, respectively. As well, Asia features a very robust beverage market that would be difficult to disrupt.
An interesting data point is that in the U.S., nearly 78% of those who purchase beer regularly are white. Hispanic/Latino Americans only comprised 4.9%. You’d expect this share to be higher if beer was making an impact with our southern neighbors, given the generally close connections between Latin communities in the U.S. and Latin America.
However it’s just not happening, which contributes to why Ambev stock looks irrelevant right now.
Is ABEV Dead? Not Quite…
With all the negatives pressuring Ambev stock, I can understand the temptation to throw in the towel. Nevertheless, I want to share with you one wrinkle that could move the needle: the raging coronavirus outbreak.
I’m not going to bore you with the latest terrible statistics. Suffice to say, the coronavirus has caused panic throughout the world. But what it has also caused is a reconsideration among large corporations and their exposure to China.
Whether it’s human rights violations, a trade war, or a pandemic, China is the pimple on everyone’s hind end. As such, many companies, including Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) are reportedly entertaining proposals to shift production outside of China. Currently, the biggest benefactors will likely be Asian countries, such as Vietnam and Thailand.
However, don’t discount Central and Latin America. Although the region has challenges, none of the countries there want to usurp U.S. national interests. Over time, this could translate to true economic growth, to the McKinsey Global Institute’s point.
Admittedly, this is a very long-term argument. Bottom line: if you’re interested in Ambev stock, you should wait it out a little bit. The discount you’re seeing now could be even steeper later.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.