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Brazilian beer giant, Companhia de Bebidas das America , also known as AmBev, reported second-quarter 2012 normalized earnings of R$0.63 per share, improving 6.8% from the prior-year quarter’s earnings of R$0.59 a share. The results were primarily driven by solid top-line performance.

However, in the U.S. dollar terms, earnings fell 21.6% to 29 cents per share from 37 cents earned in the year-ago quarter and missed the Zacks Consensus Estimate of 35 cents.

Quarter in Detail

Net sales for the quarter increased 10.4% to R$6,825.4 million compared with R$5,811.6 million in the prior-year quarter. The increase in revenues was primarily attributable to a 2.4% growth in organic volumes across all regions.

Gross profit escalated 12.7% to R$4,525.0 million compared with R$3,793.0 million in the year-ago quarter. Gross profit margin expanded 140 basis points (bps) organically to 66.3%, primarily driven by margin expansion at all other business units.

Selling, marketing and administrative expenses (SG&A) increased 18.7% year over year to R$2,003.5 million as a result of general inflation along with higher administrative and distribution expenses in Brazil and LAS. During the quarter, AmBev's normalized EBITDA hiked 9.3% year over year to R$2,975.7 million, while normalized EBITDA margin contracted 40 basis points to 43.6%.

AmBev ended the quarter with cash and cash equivalents of R$4,891.1 million and shareholders’ equity of R$26,728.0 million. During the quarter, the company paid a dividend and IOC of R$2.5 billion to its shareholders. Further, AmBev invested $628.2 million during the reported quarter to improvise its supply and warehousing facility in Brazil.

Our Recommendation

We believe that AmBev has reasons to worry following the decision of the Brazilian Federal government to raise taxes on beer and soft drinks. This tax hike threatens to limit the company’s future growth trajectory and might also adversely affect its top and bottom lines. To shield against the higher taxes, the company might inflate its prices in an effort to somewhat offset the negative impact, which however might result in lower volumes. As a result, the net income is likely to witness a fall.

Moreover, 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 AmBev’s operating performance in the future.

Currently, AmBev holds a Zacks #4 Rank, implying a short-term Sell rating. The company retains a long-term ‘Underperform’ recommendation.

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