AmBev Posts Solid 1Q

The Brazilian beer giant Companhia de Bebidas das America ( ABV - Analyst Report ) , aka AmBev, reported first-quarter 2012 normalized earnings of R$0.75 (40 cents) per share, up 11.9% from the prior-year quarter’s earnings of R$0.67 (42 cents) a share, primarily driven by solid top-line performance.

Financial Details

Net sales for the quarter increased 9.8% to R$7,235.7 million (US$4,088.2 million) compared with R$6,562.1 million (US$3,925.4 million) in the prior-year quarter. The increase in revenues was primarily attributable to higher prices and 4.3% growth in organic volumes across all regions.

During the quarter, AmBev's normalized EBITDA rose 8.9% year over year to R$3,390.3 million, while normalized EBITDA margin contracted 30 basis points to 46.9%. Margin contraction in Brazil CSD/NANC and LAS Beer divisions were partially offset by margin expansion in all other divisions.

Selling, marketing and administrative expenses increased 10.6% year over year to R$2,051 million. AmBev ended the quarter with cash and cash equivalents of R$6,711.5 million and shareholders’ equity of R$27,309.4 million. During the quarter, the company paid a dividend of R$65.5 million to its shareholders.

The company’s plan to invest R$2.5 billion in Brazil in fiscal 2012 is still on track and will look for opportunities to enhance its working capital and ascertain capex plans. Moreover, the company expects volume growth in the range of low to mid-single digits in the remaining part of fiscal 2012.

Our Recommendation

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.

Over the years, the company has taken a number of steps to sell higher-margin 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. This provides strong upside potential to the company’s profitability in future.

However, intense competition from global and regional players, such as Fomento Economico Mexicano S.A. ( FMX - Analyst Report ) and Molson Coors Brewing Company ( TAP - Analyst Report ) , coupled with the seasonal nature of its business may undermine the company’s future operating performance.

Currently, AmBev holds a Zacks #3 Rank, implying a short-term Hold rating on the stock. The company retains a long-term Neutral recommendation.