Based in Sao Paulo, Brazil, Ambev S.A. (ABEV - Get Rating) recently reported impressive third-quarter earnings results, with an 18.5% year-over-year increase in net revenues to R$18.49 billion ($3.35 billion). Its adjusted profit was R$3.75 billion ($679.90 million), representing a 50.4% year-over-year increase as the reopening of bars and restaurants drove sales higher. 

Over the past month, the stock has gained 16.8% in price to close yesterday’s trading session at $3.20.

However, the stock has declined by 0.3% in price over the past three months and is currently trading 19% below its 52-week high of $3.95, which it hit on June 8, 2021. The company also failed to offer guidance for the fourth quarter. Analysts at Bank of America have warned investors about some relevant headwinds projected for 2022. So, ABEV’s near-term prospects look uncertain.

Here is what could influence ABEV’s performance in the upcoming months:

Favorable Analyst Estimates

Analysts expect ABEV’s revenue to increase 8.1% for the quarter ending December 31, 2021, and 12.6% this year. Furthermore, its EPS is expected to grow at a 7.9% rate  per annum over the next five years. In addition, Wall Street analysts expect the stock to hit $3.46 in the near term, indicating a potential 8.1% upside.

High Profitability

In terms of trailing-12-month net income margin, ABEV’s 22.84% is 333.6% higher than the 5.27% industry average. Likewise, its 17.19% trailing-12-month levered FCF margin is 256.2% higher than the 4.83% industry average. Furthermore,  the stock’s 8.73% trailing-12-month CAPEX/Sales is 183.1% higher than the 3.09% industry average.

Market Headwinds

“While the short-term scenario for demand is constructive, we see a deterioration of the consumption environment in 2022 and competition picking up in Brazil, with new capacities coming online in the next few years, while FOREX volatility and high costs should remain headwinds,” according to Bank of America analysts.

Lofty Valuation

In terms of forward P/S, ABEV’s 4.04x is 169.4% higher than the 1.50x industry average. Likewise, its 3.86x forward EV/S is 90.3% higher than the 2.03x industry average. And the stock’s 22.57x and 3.56x  respective forward non-GAAP P/E and P/B are higher than the 20.25x and 3.41x industry averages.

POWR Ratings Reflect Bleak Prospects

ABEV has an overall C rating, which equates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by accounting for 118 distinct factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight distinct categories. ABEV has a C grade for Value, which is in sync with its higher-than-industry valuation ratios.

The stock has a D grade for Momentum, which is consistent with its 24.5% price decline over the past three years and 41.6% negative returns over the past five years.

ABEV also has a D grade for Growth. This is justified because its EPS is expected to decline 50% year-over-year to $0.04 for the current quarter, ending December 31, 2021.

ABEV is ranked #17 out of 36 stocks in the Beverages industry. Click here to access ABEV’s ratings for Quality, Sentiment, and Stability as well.

Bottom Line

Even though ABEV reported impressive second-quarter earnings results, its near-term prospects seem uncertain due to expectations that higher commodities prices will keep its financials under pressure in the fourth quarter. Because the stock looks overvalued at the current price level, we think it could be wise to wait for a better entry point.

How Does Ambev (ABEV) Stack Up Against its Peers?

While ABEV has an overall POWR Rating of C, one  might want to consider investing in Beverages stocks with an A (Strong Buy) rating, such as Coca-Cola Consolidated, Inc. (COKE - Get Rating), Compania Cervecerias Unidas, S.A. (CCU - Get Rating), and Coca-Cola Femsa S.A.B. de C.V. ADR (KOF - Get Rating).

ABEV shares were trading at $3.25 per share on Wednesday afternoon, up $0.05 (+1.56%). Year-to-date, ABEV has gained 6.73%, versus a 26.01% rise in the benchmark S&P 500 index during the same period.

About the Author: Nimesh Jaiswal

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles. More...

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