Ambev And Its Real Value

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Ambev S.A. shows strong stability and innovation but faces challenges from competitive pressure, declining profitability, and shifting consumer preferences.The company has a solid balance sheet, low ...

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Alfribeiro  Ambev S.A. (NYSE:ABEV) remains a significant player in the beverage market. The company has seen steady demand and growth in recent years. Its large portfolio of products creates diverse revenue streams that help to expand its market share. Ambev has also invested in digital innovation initiatives to continue improving operational efficiency. If Ambev can create significant brand loyalty and additional sales through its digital innovation efforts, it will help mitigate external competitive pressure. While the company has been resilient in the macroeconomic environment, Ambev is feeling the impact of its recent challenges. Shifting consumer preferences makes it difficult to grow sales and maintain market share. The barrier to entry in the beverage market is also quite low compared to other industries, making it difficult to prevent competitive pressure. Aside from the difficult macroeconomic trends, Ambev is facing rising commodity costs including aluminum and barley that are eating into profit margins. Even with the operation efficiency improvements, the current profitability has decreased compared to previous years. All of these challenges represent the many reasons the stock has recently declined compared to previous highs. When considering these current stories about Ambev , we need to determine which news topics will have a long-term and ongoing effect on the company and its share price. Overall, Ambev still has strong financial and market positions in a difficult macroeconomic environment. The company is also investing in operation efficiency measures to improve costs and expand its digital innovation to cement brand loyalty. While these are good signs that the company is stable, the growth prospects are concerning when taking into consideration competitive pressure, declining gross margins, and shifting consumer preferences. This article will focus on the long-term fundamentals of the company, which tend to give us a better picture of the company as a viable investment. I also analyze the value of the company versus the price and help you to determine if Ambev is currently trading at a bargain price. I provide various situations which help estimate the company's future returns. In closing, I will tell you my personal opinion about whether I'm interested in taking a position in this company and why. Snapshot of the Company A fast way for me to get an overall understanding of the condition of the business is to use the BTMA Stock Analyzer’s company rating score. Ambev shows a rating score of 71.125 out of 100. This is a decent score, but it shows some weakness in its fundamentals. Before jumping to conclusions, we’ll have to look closer into individual categories to see what’s going on. BTMA Stock Analyzer (Source: BTMA Stock Analyzer) Fundamentals Ambev’s share price has declined significantly from previous highs. This makes sense when we again consider the difficult macroeconomic conditions that are impacting the company’s profitability. Growth prospects in the future seem difficult when seeing consumer preference change to healthier alternatives in their beverages. I expect the share price to remain relatively flat due to the company’s stability until the macroeconomic conditions improve. Overall, the share price average has seen a decrease of about -39.13% over the past 10 years, or a negative Compound Annual Growth Rate of -5.3%.  BTMA Stock Analyzer (Source: BTMA Stock Analyzer – Price Per Share History) Earnings Earnings have risen from previous highs many years ago. Strong sales growth after Covid was the main driver of this EPS growth. I expect this number to remain flat with current growth challenges being signified by leadership at Ambev.   BTMA Stock Analyzer (Source: BTMA Stock Analyzer – EPS History) Since earnings and price per share don’t always give the whole picture, it’s good to look at other factors like the gross margins, return on equity, and return on invested capital. Return on Equity The return on equity has begun to rebound from the previous low during Covid. Ambev’s focus on continued sales growth and operational efficiencies has seen ROE begin to rise compared to its pandemic low. In 2024, sales growth is stagnating, and competitive pressures are impacting its margins. I expect ROE to slightly decline in 2024 but to still be within the current tolerance range. For return on equity (ROE), I look for a 5-year average of 16% or more. So, Ambev meets this requirement.   BTMA Stock Analyzer (Source: BTMA Stock Analyzer – ROE History) Let’s compare the ROE of this company to its industry. The average ROE of 19 beverage (alcoholic) companies is 8.7%. Therefore, Ambev’s 5-year average of 17.7% is well above its peers.  Return on Invested Capital The return on invested capital shows a return trend to previous highs before Covid. The company has continued to invest in digital innovation and sustainable initiatives to create brand loyalty and improve operational efficiency. Capital expenditure has remained higher in recent years compared to previous years, making the return impressive. The recovery after Covid has continued to improve its invested capital performance and I expect this trend to continue in the long term. For return on invested capital (ROIC), I also look for a 5-year average of 16% or more. So, Ambev also exceeds this.   BTMA Stock Analyzer (Source: BTMA Stock Analyzer – ROIC History) Gross Margin Percent The gross margin percentage (GMP) has remained stable although lower compared to its previous highs before Covid. Current competitive pressures and commodity increases have begun to eat into the gross margin of Ambev. I expect both pressures to remain over the short term and could continue to keep gross margin flat even with the operational cost efficiencies Ambev is pursuing. I typically look for companies with gross margin percent consistently above 30%. So, Ambev is above this criterion.   BTMA Stock Analyzer (Source: BTMA Stock Analyzer – Gross Margin Percent History) Financial Stability Looking at other fundamentals involving the balance sheet, we can see that the debt-to-equity is less than one. Ambev shows a strong balance sheet with the ability to pay off its obligations. Ambev’s Current Ratio of 1.10 indicates it can pay off its short-term debt. Ideally, we’d want to see a Current Ratio of more than 1, so Ambev exceeds this amount. Ambev does not carry a large debt load relative to its assets. I would like to see Ambev look to acquire products that will expand its market share in the heathier beverage area. Ambev can take on debt and pursue opportunities to diversify its product portfolio and mitigate changes in consumer preferences. Ambev pays a hefty dividend, which is also enticing for dividend investors. BTMA Stock Analyzer (Source: BTMA Stock Analyzer – Misc. Fundamentals) This analysis wouldn’t be complete without considering the value of the company vs. share price. Value Vs. Price The company’s Price-Earnings Ratio of 14.07 indicates that Ambev might be undervalued when comparing Ambev’s current PE Ratio to a long-term market average PE Ratio of 15. The 10-year and 5-year average PE Ratio of ABEV has typically been 20.7 and 18.7, respectively. This also indicates that ABEV could be currently trading at a low price when comparing to its average historical PE Ratio range. BTMA Stock Analyzer (Source: BTMA Stock Analyzer – Stock Value) The Estimated Value of the Stock is $2.26, versus the current stock price of $2.28. This indicates that Ambev is currently selling above its potential. For more detailed valuation purposes, I will be using a conservative diluted EPS of $0.16 USD. I’ve used various past averages of growth rates and PE Ratios to calculate different scenarios of valuation ranges from low to average values. The valuations compare growth rates of EPS, Book Value, and Total Equity. In the table below, you can see the different scenarios, and in the chart, you will see vertical valuation lines that correspond to the table valuation ranges. The dots on the lines represent the current stock price. If the dot is towards the bottom of the valuation range, this would indicate that the stock is undervalued. If the dot is near the top of the valuation line, this would show an overvalued stock.   BTMA Wealth Builders Club   BTMA Wealth Builders Club (Source: BTMA Wealth Builders Club ) This analysis shows an average valuation of around $2.54 per share versus its current price of about $2.28, this would indicate that ABEV is undervalued. But when considering the valuation based on low forward growth and analysts’ forecasts, the estimated value is between $1.62 and $1.99. Summarizing the Fundamentals After analyzing Ambev's fundamentals, I believe the company shows strong stability and innovation. While the price per share has fallen due to competitive pressure and declining profitability, the other fundamentals have been steadily improving from Covid lows. Fundamentals such as EPS, ROIC, and ROE all show an upward trend toward a return to pre-Covid performance. This likely means a reversal in stock price decline could come in the short term as the company's strong financial performance even in the face of macroeconomic factors may not be factored in yet. Additionally, Ambev has low debt, and a low P/E ratio compared to its history again representing a potential opportunity for investors. The counterpoint could be the reduction of GMP compared to previous years, but to combat this, the company continues to work to improve cost efficiencies which is mitigating competitive pressure on its products. The stock offers low growth, but on the positive side it offers a large dividend. Ambev is required to pay a minimum of 40% of its adjusted annual net income. In terms of valuation, my analysis shows that the stock is slightly undervalued. Ambev Vs. The S&P 500 Now, let’s see how Ambev compares versus the US stock market benchmark S&P 500 over the past 10 years. From the chart below, Ambev has never outperformed the overall market. I do not expect this to change even if the stock is currently undervalued. However, Ambev can be considered as a defensive stock, which pays a high dividend and can continue to grow dividends. The stock price declined since Covid and has been stagnant since. However, the fundamentals show that the company has recovered, and the price has yet to adjust and to reflect the recovered fundamentals. Morningstar Forward-Looking Conclusion Over the next five years, the analysts that follow this company are expecting it to grow earnings at an average annual rate of 2.75%.  In addition, the average one-year price target for this stock is $3.12 which is about an 936.8% increase in a year.  Does Ambev Pass My Checklist?   Company Rating 70+ out of 100? Yes (71.12)  Share Price Compound Annual Growth Rate > 12%? No (-5.3%)  Earnings history mostly increasing? Yes  ROE (5-year average 16% or greater)? Yes (17.7%)  ROIC (5-year average 16% or greater)? Yes (17.5%)  Gross Margin % (5-year average > 30%)? Yes (52.69%)  Debt-to-Equity (less than 1)? Yes  Current Ratio (greater than 1)? Yes  Outperformed S&P 500 during most of the past 10 years? No  Do I think this company will continue to successfully sell the same main product/service for the next 10 years? Yes   Ambev scored 8/10 or 80%. Therefore, Ambev could be a good potential investment to consider.  Is Ambev Currently Selling at a Bargain Price?  Price Earnings less than 16? Yes (14.07)  Estimated Value greater than the Current Stock Price? No (Value $2.26<$2.28 Stock Price)  Detailed Valuation greater than the Current Stock Price? Yes (Value $2.54<$2.28 Stock Price)   Ambev is an interesting case of a stock with strong stability in a stable market with low growth potential. The rising fundamental financial performance shows optimism that the stock is currently undervalued. This is due to concerns over competitive pressure and decreased profitability which could be overblown because of Ambev’s ability to improve returns on its investments. I would like to see the company continue to acquire up-and-coming beverage producers that sit in markets that are not within Ambev’s current portfolio. Ambev has a strong balance sheet with surplus cash and its improving fundamentals indicate that the share price should start increasing. In addition, the dividend of around 6% is enticing and it could provide some defense against a possible correcting US market. However, even with these positive factors, I’m not yet convinced about taking a position in this company.  I may add it to my watchlist and continue to monitor it, but I would like to see Ambev make moves to acquire new products to attract new customers and to possibly see the company making some positive momentum in share price before considering adding it to my portfolio.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2479379123"}