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Brazilian beer giant, Companhia de Bebidas das America , also known as AmBev, reported robust third-quarter 2012 normalized earnings of R$0.81 per share, substantially beating the prior-year quarter’s earnings of R$0.53 a share by 52.6%. The results were primarily driven by solid top-line performance, improved margins and lower tax rate.

Moreover, in the U.S. dollar terms, earnings came at 39 cents per share which beat the Zacks Consensus Estimate of 35 cents.

Quarter in Detail

Reported net sales increased 26.1% to R$8.036 billion compared with R$6.375 billion in the prior-year quarter. The increase in revenues was primarily attributable to a marginal hike of 1.5% in volumes across all regions. On an organic basis, total revenue jumped 15.1% from prior-year quarter despite a 0.5% decline in overall organic volume.

In spite of the input cost pressure, organic gross profit escalated 17.1% to R$5.414 billion compared with R$4.244 billion in the year-ago quarter. Gross profit margin expanded 120 basis points (bps) organically to 67.4%, primarily driven by margin expansion at every business units.

Selling, marketing and administrative expenses (SG&A) increased 16.2% year over year as a result of higher administrative and distribution expenses in Brazil. During the quarter, AmBev's normalized EBITDA climbed 19.2% year over year to R$3.802 billion, while normalized EBITDA margin expanded 160 basis points to 47.3%.

AmBev ended the quarter with cash and cash equivalents of R$4.531 billion and shareholders’ equity of R$27.496 billion. The company generated R$4.366 billion of cash from its operating activities. Moreover, the company paid a dividend and IOC of R$1.2 billion to its shareholders during the quarter. Further, it invested $0.966 billion during the reported quarter to improvise its supply and warehousing facility in Brazil.

Our Recommendation

We have maintained our long-term ‘Underperform’ recommendation on AmBev, anticipating negative impact on its future financial performance due to Brazilian government's decision to raise taxes on beer. To shield against the higher taxes, AmBev might inflate its prices in order to somewhat offset the negative impact, which may result in lower volumes. Consequently, the net income may be pulled down.

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.

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