Why you should buy Ambev shares
By Chad Padowitz
Ambev is one of the largest brewing companies globally and holds a dominant position in Latin America's highly concentrated beer market.
With attractive organic growth prospects, high returns on capital, and a strong balance sheet, Ambev offers substantial upside at current prices.
Ambev trades at a significant discount to its historical averages, offering investors an opportunity to capitalise on both potential share price appreciation and regular income through dividends via their high dividend yield.
What does Ambev do?
Ambev is Latin America's largest brewer, producing and selling globally recognised brands such as Budweiser, Corona, and Brahma.
Headquartered in Brazil, the company generates around 85% of its earnings before interest and taxes from five countries: Brazil, Argentina, the Dominican Republic, Canada, and Bolivia.
In Brazil, Ambev controls approximately 66% of the beer market, operating in a duopoly with Heineken, which holds 26%.
The company's dominance extends to near-monopoly positions in the Dominican Republic and Bolivia, while it controls three-quarters of Argentina's beer market and half of Canada's.
Why is Ambev successful?
Ambev's success is built on its ability to leverage scale and market dominance to drive profitability.
Over the years, the company has successfully shifted its focus towards premium beer brands while maintaining price discipline.
This strategy has enabled it to grow its top line by an average of 9.4% since 2008, primarily driven by a mix of premiumisation and price increases.
After experiencing a cyclical slowdown in 2023, Ambev is already showing signs of recovery, with growth rebounding in the second quarter of 2024. This rebound is expected to continue as commodity prices stabilise and demand picks up, positioning the company for further improvement in margins.
While Ambev's operating margin dropped to a low of 21.7% in 2022 due to rising costs and currency pressures, we expect a gradual recovery. By 2027, we forecast margins to expand to 24.6%, supported by efficiency gains and the company's ability to maintain pricing power in its key markets.
How is Ambev performing?
Ambev is renowned for its strong cash flow generation, having generated over 12 billion reals in free cash flow (FCF) in 2023, which translates to a 6% FCF yield.
Since 2014, the company has maintained nearly 100% cash conversion rates, allowing it to return close to 90% of its FCF to shareholders as dividends. Currently, the dividend yield stands at an attractive 5.5%.
Looking ahead, based on conservative assumptions, including an average annual organic revenue growth of 4.3% and a return on invested capital (ROIC) of 27% by 2027, we estimate that Ambev shares could reach $3.60 by 2027, a substantial upside from the current price of $2.50.
Furthermore, Ambev holds a net cash position of 10.7 billion reals, giving it the flexibility to pursue growth opportunities or return additional capital to shareholders.
The main risk Ambev faces is currency depreciation, as about 50% of its profits are generated in Brazilian reals, while shares held in the fund are ADRs priced in USD.
Despite this, Ambev's strong balance sheet, robust cash flow, and attractive valuation provide a margin of safety, making the stock appealing even in challenging market conditions.
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