Ambev SA - An Undervalued Income Stock

Ambev is a Refreshing Investment Opportunity (SO:FTCE11B) in South America's Beverage MarketAmbev, (NYSE:ABEV) a leading beverage company operating in South America, Caribbean and Canada. It is majority owned by Anheuser-Busch InBev (EBR:ABI) SA. As investors seek opportunities in emerging markets, Ambev stands out as a compelling choice in the alcoholic and non-alcoholic beverage sector. It sells a number of brands across the regions in operates in.

Source: Company website

Financial Performance: A Toast (NYSE:TOST) to Success

Ambev has demonstrated growth across key financial metrics in recent years. The company's net income, total revenue, and operating income have all shown positive trends, indicating a robust business model and effective management strategies. One of the most encouraging signs for investors is Ambev's increasing earnings per share (EPS). This upward trajectory of 5.2% CAGR over the last 5 years not only highlights the company's profitability but also its ability to generate value for shareholders. With a healthy gross margin of 50.98% and a net profit margin of 16.92%, Ambev showcases efficient cost management and operational profitability. Net income and free cash flow over the last 5 years show an increasing trend after being impacted by the pandemic. However the stock price for the US listed ADR (NYSE:ABEV) has drifted down (partly as a result of the strength of the US dollar). I think this is an opportunity for US based investors looking to diversify their holdings outside the US.

Solid Financial Foundation

Ambev's financial position is excellent, with no net debt and adequate liquidity. The company's debt-to-equity ratio stands at a mere 0.3%, indicating a highly conservative approach to leverage. This prudent financial management, coupled with gradually increasing shareholders' equity, provides a solid foundation for future growth and expansion.

Valuation: An Underappreciated Gem?

Current market valuations suggest that Ambev may be undervalued, presenting an attractive entry point for investors. The company's price-to-earnings (P/E) ratio of 13.3 is lower than both its historical levels and those of its peers. Ambev's enterprise value to free cash flow ratio has averaged around 19% over the last five years, lagging behind the industry average of 24%.

Analysts seem to agree with this assessment, setting a 12-month price target of $3.20 for Ambev's stock. This represents a potential upside of 32.78% from its current price, further supporting the notion that the stock may be undervalued.

ABEV Data by GuruFocus

Strong Profitability and Valuation

Ambev's potential has not gone unnoticed by institutional investors. Renowned firms such as Renaissance Technologies (Trades, Portfolio), as well as noted Value investors Richard Pzena (Trades, Portfolio) and First Eagle Investment (Trades, Portfolio) shown significant interest in the stock, further validating its investment appeal.

Ambev demonstrates strong profitability compared to its peers:

• Return on Equity (ROE) of 15.52%, which is 4.02% above the industry median of 7.7%
• Gross margin of 50.98%, indicating efficient production and pricing power
• Operating margin of 23.87%, reflecting strong operational efficiency
• Net margin of 16.92%, showing solid overall profitability
• These metrics suggest Ambev is more profitable than many of its competitors.
• In terms of valuation Ambev appears to be well placed with low PE Ratio Price to Operating Cash flow Ratio and EV/EBITDA Ratio. Ambev currently offers the highest dividend yield of its global competitors.

6.96% Dividend Yield is a cherry on this cocktail

Ambev has consistently paid dividends, demonstrating its commitment to returning value to shareholders. Currently the dividend yield is 6.96% which the company has grown at the annualized rate of 9.7% over the last 5 years. This shareholder-friendly approach, combined with significant capital expenditures, reflects the company's focus on both rewarding investors and investing in future growth opportunities.

Growth Outlook: Tapping into Latin American Markets

The beverage alcohol industry is poised for growth, with global volumes expected to rise at a compound annual growth rate (CAGR) of 1% between 2021 and 2026. Latin American markets, including Brazil, Mexico, and Colombia, are anticipated to be key drivers of this growth. Ambev's strong presence in these regions positions it well to capitalize on this trend. Another trend which Ambev is exploiting is "premiumization". Ambev has been strategically expanding its portfolio of premium beer brands, which is yielding positive results. In the third quarter of 2024, the company reported substantial growth in premium brands like Corona and Budweiser, especially in the Brazilian market. This focus on higher-end products allows Ambev to capture more value per unit sold and improve profit margins.

A Refreshing Investment Opportunity

In conclusion, Ambev presents a compelling investment case for those looking to tap into the Soth American beverage market. With its strong financial performance, stable position, profitability, and shareholder-friendly approach, Ambev offers a well-rounded investment opportunity. The company's current valuation compared to its low price, dividend yield, coupled with positive growth prospects in its key markets, suggests that now may be an opportune time for investors to consider adding Ambev to their portfolios. This is especially true given the dearth of value opportunities in the current over-valued US market. According to Gurufocus the current PE for the US S&P 500 is 30.471. In contrast the current PE for Ambev is 13.93.

As with any investment, it's crucial to conduct thorough research and consider your individual financial goals and risk tolerance. However, for those seeking exposure to emerging markets and the beverage industry, as well as a solid dividend yield, Ambev could be the refreshing addition your investment strategy needs.

This content was originally published on Gurufocus.com