The stock market recently witnessed a relief rally, with October inflation data showing signs of cooling down. However, it seems unlikely that the Federal Reserve would decide on a monetary policy pivot soon.
David Page, head of macro research at AXA IM, believes the Fed may raise rates two more times to 4.75% to 5% by March before pausing and would not reduce them unless the job market weakens significantly.
A tight monetary policy is expected to tip the U.S. economy into a recession. JPMorgan economists have predicted a mild recession next year. The institution expects the U.S. economy to contract by 0.5% by the fourth quarter of next year. The situation could possibly stretch in 2024 as well.
Against this backdrop, it’s always wise to play defensive when investing. Businesses of consumer staples like food and beverages are considered defensive as they enjoy stable demand even when the economy witnesses a downturn. Therefore, investors seeking a defensive stock could consider Brazil-based beverage maker Ambev S.A. (ABEV).
ABEV experienced strong momentum in its Brazil operations in the third quarter. Jean Jereissati, the CEO, stated, “Our Brazilian business built up momentum this quarter, delivering double-digit top-line and bottom-line growth, which more than offset continued headwinds in some of our international operations.”
The stock has gained 1.1% year-to-date and 3.3% over the past month to close its last trading session at $2.83.
Here are the factors that could influence ABEV’s performance in the near term:
For the fiscal third quarter of 2022, ABEV’s net revenue increased 11.3% year-over-year to R$20.59 billion ($3.85 billion). Gross profit rose 7.6% from the prior-year quarter to R$9.94 billion ($1.86 billion). Normalized EBITDA improved 2.4% from the prior-year period to R$5.60 billion ($1.05 billion). Its normalized EPS stood at R$0.20.
ABEV’s trailing-12-month net income margin and levered FCF margin of 16.57% and 9.71% are 296.7% and 234.8% higher than the industry averages of 4.18% and 2.90%. Its trailing-12-month ROCE, ROTC, and ROTA of 14.80%, 11.72%, and 9.22% are 36.6%, 89.7%, and 131.8% higher than their respective industry averages of 10.84%, 6.18%, and 3.98%.
Impressive Past Growth
ABEV’s revenue has grown at a 14.4% CAGR over the past three years and 11.4% CAGR over the past five years. Net income and EPS surged at CAGRs of 5.9% and 5.8% over the past three years. Its total assets have grown at an 11.5% CAGR over the same period.
Analysts Expect Top-line Growth
The consensus revenue estimates of $4.58 billion and $3.67 billion for the fiscal quarters ending December 2022 and March 2023 indicate 16.1% and 3.8% year-over-year improvements.
The consensus revenue estimate for the current year of $15.70 billion reflects a rise of 16.3% from the prior year. Moreover, analysts expect revenue to increase 5.5% year-over-year to $16.57 billion in the next year.
POWR Ratings Reflect Promising Prospects
ABEV’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different 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 Quality grade of A, in sync with its strong profitability. The stock also has a B grade for Sentiment, consistent with analysts’ favorable topline estimates.
In the 34-stock Beverages industry, it is ranked #12. The industry is rated A.
Click here to see the additional POWR Ratings for ABEV (Growth, Value, Momentum, and Stability).
View all the top stocks in the Beverages industry here.
ABEV has gained significant business momentum in Brazil. Given ABEV’s solid fundamentals and growth prospects, it could be a good investment to play defensive amid the economic uncertainties.
How Does Ambev S.A. (ABEV) Stack up Against Its Peers?
While ABEV has an overall POWR Rating of B, one might consider looking at its industry peers, Coca-Cola Consolidated, Inc. (COKE) and Coca-Cola FEMSA, S.A.B. de C.V. (KOF), which have an overall A (Strong Buy) rating.
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ABEV shares were trading at $2.79 per share on Thursday afternoon, down $0.04 (-1.41%). Year-to-date, ABEV has declined -0.36%, versus a -15.98% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Dutta
Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research. More...
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