Ambev (NYSE:ABEV) is one of the world’s largest brewing companies. It’s right up there with its corporate parent, Anheuser-Busch Inbev “ABI” (NYSE:BUD), and rival Heineken (OTCMKTS:HEINY). Ambev’s market capitalization reflects its size; even after a punishing decline in Ambev stock, the company is still worth almost $50 billion.
Even so, Ambev may be less of a household name for U.S.-based investors. That’s because Ambev is ABI’s subsidiary for most of the Americas. Ambev derives the majority of its business from Brazil; it also has large franchises in Canada and the rest of Central and South America.
Brazil alone has more than 200 million people, and Ambev has access to many millions more with its businesses in the rest of the Americas. Ambev also enjoys concentrated markets; it’s No. 1 or 2 in virtually all its markets and has monopolistic market share in many places.
Despite the positives, Ambev stock has plunged in recent months. Here’s what went wrong, and how things will turn around for Ambev.
Beer Is Tapped Out
It’d be easy to look at Ambev’s stock chart and assume that the company has some sort of unique problem. After all, Ambev shares hit their lowest point in the past decade during the March crash. That’s obviously disappointing for long-term investors.
Keep in mind, however, that it’s not only Ambev. Corporate parent ABI saw its own stock lose as much as two-thirds of its value in recent years. Other regional competitors, like Chile’s leading brewer Compania Cervecerias Unidas (NYSE:CCU) are also down 50% off their highs. So, this is hardly just an Ambev problem.
What’s driving beer’s poor performance? The novel coronavirus is one clear problem. Much of beer consumption occurs “on-premise” which is to say at bars and restaurants. Ambev is particularly tied to this. Across much of South America, bars and local restaurants sell beer extremely cheaply and thus are hugely popular places to hang out. It’s an affordable luxury, even for lower-class workers.
However, with the coronavirus, much of this sales activity is gone. Colombia, for example, has been under perpetual hard quarantine (no sit-down bars or restaurants whatsoever) since early March. That’s a stark difference from Europe and the U.S. (markets where Ambev isn’t present) where reopening is occurring at a much faster pace.
Even ignoring coronavirus, beer has faced other struggles. For one, younger drinkers have shown a growing preference for spirits in recent years. That shift in alcohol market share has hurt pure beer players.
Additionally, the move toward craft beer has hurt macro beer at the margins. Craft beer is not widely consumed in most of Ambev’s markets other than Canada. However, craft still hurts sentiment, particularly among investors who aren’t familiar with the South American big brand-favoring beer market on a firsthand basis.
Ambev Stock Will Get Through This
Ambev has several points in its favor. For one, it controls nearly 60% of the Brazilian market. The major competitor is Heineken, however when two companies control most of a mass market, there’s plenty of profit to go around.
In other Latin American markets, Ambev has as much as 90% market share and faces even fewer challengers to its dominance. While currencies and economies will fluctuate, beer sales are steady business. As the dominant player in numerous countries, Ambev will keep earning profits.
Additionally, Ambev has a fantastic balance sheet. In fact, it holds a net cash position. That’s a huge advantage versus the likes of an ABI or Molson Coors, both of which have tons of debt. Investors may be trading Ambev similarly to those other stocks; if beer is down, then Ambev should fall as well you might think.
However, since Ambev has no debt, it’s in far better shape to hold on while the economy is weak. Molson Coors and ABI, by contrast, have slashed their dividends and cost structures to try to conserve cash.
Ambev Stock Verdict
For a company that is near its lowest level in 10 years, there is a surprisingly high number Ambev skeptics. The concerns about the coronavirus make sense; sales will be weak until South America starts to get back to normal. The continent has been absolutely slammed by the virus, so it will take a while for things to open back up.
More broadly, however, the concerns about Ambev just don’t make a lot of sense. Skeptics say Brazil and its currency are too volatile. That’s long been true, yet ABEV stock rallied from 50 cents per share in 2000 to $9 in 2011. That’s an 18x return despite Brazil’s up-and-down economy.
At the end of the day, Ambev sells beer in a market where beer is well-liked, and consumers have modest demands. As long as Ambev and Heineken deliver good products at a fair price point, they’ll get plenty of sales. Sure, they compete in the same way that Coca-Cola (NYSE:KO) and Pepsico (NYSE:PEP) have their brand war. However, both make gobs of money; the same goes for beer.
And since Ambev has a net cash position, it’s in fine shape to ride out the current economic mess. No doubt it will forego some profits this year with the economic downturn. But it won’t leave a permanent mark. In 2021 or 2022 when the economy turns around, Ambev will come soaring back.
From 2016 to 2018, as Brazil recovered from its last recession, Ambev stock surged 75%. Investors should enjoy similarly refreshing gains as bars and restaurants reopen in South America later this year.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he owned CCU, TAP, HEINY, and ABEV stock.