Risk/Reward Poised at AmBev

We maintain our ‘Neutral’ recommendation on Companhia de Bebidas Das Americas (ABV - Analyst Report), also known as AmBev. AmBev is the leading brewer in Brazil, Canada, Argentina, Paraguay, Uruguay and Bolivia with a strong portfolio of globally recognized brands, such as Brahma, Skol, Antartica, Quilmes, Labatt, Pilsen and Paceña. This provides a competitive advantage to the company and reinforces its dominant position in the market.

Further, AmBev continues to witness strong demand from its key market of Brazil, which drove performance during the second quarter of 2011. AmBev’s strength in Brazil is expected to bolster its pricing power moving forward.

Also, over the years, the company has taken steps to sell higher-margined premium products and improve productivity and efficiency of its facilities through initiatives such as the adoption of a management control system based on zero-based budgeting that avoids unnecessary expenses. It ensures sustained profitability for the company.

On the flip side, the company faces intense competition from established rivals in the beer segment, such as Fomento Económico Mexica (FEMSA), SABMiller and Molson Coors, while in the non-alcoholic segment AmBev competes with the industry icon Coca-Cola Co. Additionally, the company also encounters competition from local and regional players in the respective countries of operation. Consequently, the company is under severe stress to maintain profitability.

Moreover, AmBev’s business is seasonal in nature and generates a high proportion of sales in Latin America during the fourth quarter due to early summer and year-end festivities, while in Canada sales are stronger in the second and third quarters due to the summer season. Seasonal demand exposes the company to risks, should the seasons fail to deliver expected operating performance.

Additionally, prolonged macroeconomic headwinds have compelled customers to cut down on discretionary spending and postpone plans for big-ticket items. This has affected the top-line of the company as most of its products are skewed toward the premium range.

The stock retains a short-term Zacks #3 (Hold) Rank.

Read the full analyst report on ABV