Risks & Reward Balance AmBev

We are keeping our current Hold recommendation on Companhia de Bebidas das Americas, or AmBev (ABV - Analyst Report). Despite lower-than-expected results in the first quarter, the company delivered top-line growth above volume growth.

Quinsa's (LQU) results were also positive, and the North American results continued to show some improvements. However, the less benign monetary policy in Brazil, growing inflation in Argentina, the strength of the Brazilian real and its effect on the company's international sales, weak results in Central America, higher commodity costs, and the difficult economic environment in the U.S. are matters of high concern.

Presently, AmBev is trading at 26.2x our 2008 EPS estimates, higher than the industry mean of 17.3x. Excluding the company's goodwill amortization, its 2008 P/E would be close to 16.5x, close to the industry median. AmBev has good growth prospects, above average profitability, history of good results, dominant position in Latin America, and increasing geographical diversification.

In our opinion, ABV's valuation should increase to 18x EPS estimate without the goodwill amortization, with a small premium above some international players like Anheuser Busch (BUD - Snapshot Report) and Brown Forman, which have lower growth outlooks and are more exposed to the problems of the U.S. market. Our target price is $84.25.

Read the full analyst report on ABV.

Read the full analyst report on BUD.