Ambev: Still a lot to do after Q3 earnings print (NYSE: ABEV)

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buddha mendes

Introduction

Ambev S.A. (New York Stock Exchange: ABEV) recently reported its third quarter earnings, where the company met its earnings expectations (EPS of $0.04) with the Brazilian market once again in the foreground. However, the weakness in international markets such as Central America and the Caribbean is worrisome going forward, especially if inflation persists into next year. Suffice it to say that while sales may benefit from rising inflation early on, volume growth sooner rather than later has to follow suit to ensure sales can stay on a growth curve. the beer The Ambev market remains resilient, but it will be interesting to see if this trend continues, especially if economic conditions continue to tighten. However, the upcoming World Cup should provide a solid boost for Ambev’s brands. Management actually reiterated its forward-looking EBITDA guidance to this effect.

If we pull out a long-term chart of Ambev, we can see that the stock continues to have significant overhead resistance above the prevailing share price at roughly the $3 level. Despite the encouraging quarter, the long-term trend (confirmed by lower highs) remains bearish. So, there is definitely an opportunity here if indeed Ambev can break through its strong overhead resistance. To determine whether we think this is possible in the short term, we like to dig into stock valuation and return trends. A strong and sustainable dividend is typically driven by a steady earnings growth curve, so let’s see how these metrics play out below.

Abev air resistance

ABEV technical chart (StockCharts.com)

payout ratio

The Dividend Payout Ratio provides a quick snapshot of whether Ambev’s dividend is strong or not. Currently, the cash flow payout ratio is 75.3%, well above the company’s 5-year average percentage of 60%. Remember, because non-cash costs on the income statement can sometimes blur the earnings payout ratio, we prefer to go with the cash flow alternative to get a more accurate picture of affordability. Suffice it to say that, despite the higher yield Ambev currently pays, the company currently has less wiggle room with respect to sustained dividend increases because a greater percentage of the company’s cash flow is used for investment purposes. dividends.

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Cost effectiveness

Ambev has traditionally had a very strong return compared to the sector as a whole. The company’s return on equity of 11.72% over the last twelve month average remains high and demonstrates the company’s ability to grow its capital. However, it has been the company’s margins that have come under scrutiny of late. For example, Ambev’s gross profit margin of just under 50% (average over the last twelve months) is well below its 5-year average of 57%. Up to this point, we have seen some weakness regarding earnings revisions for this current fiscal year, but earnings projections for next year have actually come out over the last 30 days. It will be interesting to see how Ambev’s profitability fares over the next 6 months or so.

Ambev earnings reviews

Ambev Consensus EPS Revisions Trend (Seeking Alpha)

Valuation

Now, given the above technical picture and the considerable drop in the share price since the beginning of 2018, one could easily argue that the stock is considerably undervalued today, all else being equal. However, the forward EV/EBITDA multiple of 9.29 is only 20.7% lower than the company’s 5-year average multiple of 11.71. Obviously, this is a much lower percentage than many would suspect on this play, and this is really the key here. Due to growth issues, the market believes that Ambev’s strong profitability is simply not worth a much higher EV/EBITDA multiple, for example. Also, given the high payout ratio, the potential to aggressively continue to invest behind the business and/or significantly increase the dividend is affected to some extent. This is why Ambev is holding today until the stock builds the necessary momentum to break through that important overhead resistance.

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conclusion

Although there was plenty of encouragement in Ambev’s recent Q3 earnings, the long-term trend remains bearish. Continued strength in Brazil, as well as the upcoming World Cup, should continue to be able to offset significant headwinds in other parts of the business, but overall volume growth remains key. We look forward to continuing coverage.

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