Morningstar | Ambev's 2019 Outlook Tepid as Cost Inflation Looms, but 4Q Could Have Been Worse
Ambev may have beaten our top-line estimates in the fourth quarter, but it was a poor year for the Latin American brewer, with volume down 2.5% in the year. Brazil continues to gyrate, although trends improved sequentially in the fourth quarter. Guidance for 2019 will hardly inspire investors, as Ambev will face midteens input cost inflation in Brazil and appears unlikely to be able to pass this through. We have tempered our volume, pricing, and margin assumptions for next year but still believe that there is some upside to the stock for patient investors. Our BRL 20 fair value estimate and wide moat rating are unchanged.A fourth-quarter volume decline of 2.1% in Beer Brazil was poor, but it could have been worse, given the ongoing macroeconomic volatility there. Pricing declined materially in the fourth quarter as the company cycled double-digit pricing from a year ago. With further tough comps in the first half of 2019 still to come, it seems unlikely that Ambev will be able to pass through commodity cost inflation this year, and we now forecast a substantial 260-basis-point reduction in the consolidated gross margin next year.
Ambev's gross margins, and consequently operating margins, have contracted significantly from a peak of 68% in 2012 to under 62% in 2018, driven by Brazil, and our valuation assumes a rebound in the gross margin to 66% within four years. We still believe Latin America is an attractive market. In a more stable geopolitical environment, the consumer is likely to resume trading up, which should drive price, mix, and margins.
The entrance of Heineken in Brazil seems likely to drive sales and marketing expenses higher, which means that structural cost control will be important to Ambev hitting our forecasts. On this score, the company posted progress in the the fourth quarter, with administrative expenses down by BRL 250 million and by 70 basis points as a percentage of net revenue.
Ambev is a beverage manufacturing group based in Brazil. Co. produces and sells beer, draft beer, soft drinks, other non-alcoholic beverages, malt and food in general, by participating either directly or indirectly in other Brazilian-domiciled companies and elsewhere in the Americas. Co. has operations in 18 countries: Brazil, Canada, Argentina, Bolivia, Chile, Paraguay, Uruguay, Guatemala, Dominican Republic, Ecuador, Peru, El Salvador, Honduras, Nicaragua, Saint Vincent, Dominica, Cuba and Antigua. Co. conducts its operations through three business segments: Latin America North, Latin America South and Canada.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
We have operations in 27 countries.
Unfortunately, this report is not available for the investor type or country you selected.
Browse all ResearchPool reportsReport is subscription only.
Thank you, your report is ready.
Thank you, your report is ready.