Ambev (NYSE:ABEV), the Brazilian brewing company that focuses on Latin America, has seen its stock decline to multi-year lows. In the last five years, the high of Ambev stock was $7.10. The shares are currently about 55% below that level, as they are changing hands for $3.28.
While Ambev is facing multiple difficulties, I believe that the valuation of the stock is attractive, making it a buy. All of the challenges the company is facing, including the weak macroeconomic outlook, the contraction of its EBITDA margin and corruption charges, appear to already be reflected in the shares.
My view is backed by most analysts. Three analysts have a median price target of $5.5 on Ambev stock, while the lowest price target among analysts on the shares is $3.5o. Ambev stock currently trades below the lowest target, indicating that it’s oversold.
Ambev’s Major Problems
The first factor that has kept Ambev stock depressed for years is the macroeconomic difficulties of Latin America. According to International Monetary Fund data, real GDP growth per capita in the region has declined by 0.6% per year on average between 2014 and 2019. Weak GDP growth has contributed to the company’s sluggish top-line growth and the contraction of its margins.
While Brazil’s GDP growth is likely to accelerate to 2.2% in 2020 from 1.2% in 2019, the coronavirus factor still needs to be considered.
Another factor that has depressed the stock in the recent past is the corruption allegations against Ambev by a former Brazilian finance minister . While Ambev called the charges “false and incoherent,” the stock reacted negatively to the news. The country is still investing Ambev.
Finally, the company issued weak Q1 guidance. For Q1, the company expects upward pressure on its manufacturing costs and “front-loaded sales and marketing investments.” That will cause its EBITDA to fall sharply. While the company expects its performance to improve in the coming quarters, it’s likely to continue to have cost pressures through FY20.
The Positive Aspects of Ambev’s Business
The concerns described above dominate the headlines regarding Ambev and have dictated the performance of Ambev stock. However, the company does have positive catalysts which can spark a rally of Ambev stock from its current oversold levels.
The first positive is the company’s growth in the Brazilian non-alcoholic beverage market. For Q4, it reported 13% year-over-year growth in the segment, while the EBITDA margin of the business increased 11.6 percentage points.
I am bullish on the company’s non-alcoholic beverage segment because it’s focused on launching premium products in Brazil, which should help it increase its EBITDA margin and could also cause its revenue growth to accelerate.
Ambev expects its Brazilian beer business to enable its EBITDA to resume increasing this year. In FY19, the segment’s EBITDA fell 6.5% YOY. If its EBITDA does rebound after Q1, the stock is likely to respond positively.
Ambev’s business in Canada has been disappointing, as the unit’s revenue and EBITDA dropped 1.9% and 10.7% respectively in FY19. The company is, however, trying to innovate in Canada with a pipeline of ready-to-drink products. If those innovations result in a top-line turnaround, I expect Ambev stock to react positively.
Ambev is well-positioned from a financial perspective ,with total debt of just 3.1 billion Brazilian real. With cash and equivalents of 11.9 billion Brazilian real, it has ample financial flexibility and no balance sheet stress. Even in challenging times, the company has maintained healthy operating cash flows and positive free cash flow.
My Concluding Views on Ambev Stock
Ambev is facing multiple challenges, including weak macroeconomic conditions, competition, the stagnating growth of the beer market and corruption charges. However, Ambev stock is trading at multi-year lows, and these factors are largely reflected in the stock.
Any improvement of the company’s EBITDA margin or sustained growth by its non-alcoholic beverage segment should take Ambev stock higher.
Faisal Humayun is senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock-specific articles with a focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.
