Shares of AmBev (ABV), the dominant beer maker in Brazil (69% market share), Argentina (76%), Bolivia (97%), Paraguay (96%), and Uruguay (97%), have been on a roll since the stock moved above its 50-day moving average on August 16. Shares are up 14% since August 13. (The company is no slouch in Canada either with a 42% market share.)
And I think the stock is headed higher. I’m raising my target price to $143 a share by March 2011.
I guess you could say the catalyst was the company’s August 12 earnings report. But more accurately I think the stock is moving up on a reduction in investor worry about risk in general (and emerging market risk in particular) and a realization that the second half of 2010 is definitely easier for AmBev than the first half.
For the second quarter, net sales grew by 11.5% thanks to volume and price increases. Volume growth (excluding acquisitions) came to 8.3%. Brazil with 12.6% volume growth led the company while volume fell by 5.5% in Canada.
That sales growth didn’t all translate into profits because the cost of goods sold and selling, general and administrative expenses all rose. Hedges to protect against higher sugar prices and a rising real added to costs as did investments in marketing in advance of the World Cup. That took EBITDA (earnings before interest, taxes, depreciation and amortization) margins down to 42.7%.
That’s not to say that profits fell. EBITDA earnings grew by 4.7% (again excluding acquisitions). Cash from operations climbed by 8.9%. Normalized earnings per share increased by 9.1%.
I expect that the profit picture for the second half of the year will improve thanks to a drop in marketing costs (the World Cup in South Africa is over) and continued cost cutting at AmBev. The second half of 2009 was also tough for AmBev so the company is facing easier comparisons. I think EBITDA margins will rebound enough so that the company will average margins of 45% for the year.
Full disclosure: I don’t own shares of any company mentioned in this post in my personal portfolio.