Headquartered in Brazil, Ambev S.A. (ABEV) is a multinational beverage manufacturer that operates across North and South American countries. After delivering modest gains for several months since the onset of the coronavirus pandemic, ABEV stock has picked up momentum over the last couple of months and has surged nearly 25% over the past six months. As the global economy recovers and spring arrives, the demand for cold beverages has been rising significantly, in tandem with outdoor activities. Indeed, the penny stock has been gaining in double digits as North and Central American countries continue to recover rapidly.

However, with Brazil still struggling to curb its coronavirus outbreak, ABEV’s overall growth potential looks bleak. Analysts expect the company’s EPS and revenues to improve only slightly from its year-ago values in 2021.

Here’s what we think could shape ABEV’s performance in 2021:

Brazil COVID Outbreak

Brazil faced the second worst COVID-19 outbreak in the world, following the United States, with more than 294 thousand  deaths as of March 22, 2021, according to Statista. However, the country is still struggling to control the spread of infection at a time when the United States has begun vaccinating its population en masse. The OECD Economic Survey of Brazil forecasts the country’s GDP will decline 5% in 2020, wiping out years of economic progress. The country’s GDP is expected to grow at a modest2.6% in 2021 and 2.2% in 2022.

As a Brazilian company,  with the dominant proportion of its business concentrated in Latin American, ABEV is facing significant exogenous headwinds. Also, the strengthening U.S. dollar has affected ABEV’s financials because the company’s sales are in Brazilian Reais while a significant portion of its debt is denominated in U.S. dollars.

Robust Financials

With a market capitalization of $41.34 billion, ABEV has generated $11.24 billion in revenues over the past year. Its trailing-12-month gross profit and net income values are $6.03 billion and $2.19 billion, respectively. The company has earned 14 cents per share over this period.

ABEV’s profitability ratios surpass the industry averages by huge margins. Its trailing-12-month gross profit margin of 53.64% is 51.4% higher than the industry average  35.43%. Its net income and levered free cash flow margins of 19.49% and 23.52%, respectively,  are more than 300% higher than the  industry averages. But its trailing-12-month ROE, ROA and ROTC values of 16.85%, 9.09% and 11.3%, respectively, compare favorably with industry averages.

With a high cash balance and low debt, ABEV’s demonstrates significant balance sheet strength. In fact, its enterprise value of $39.14 billion is slightly lower than its market capitalization. The company’s net operating cash flow has totaled  $3.63 billion over the past year, with a total cash balance of $3.62 billion. ABEV’s long-term debt accounts for only 2.57% of total capital, while its  total-debt-to-equity multiple stands at 6.38%. Furthermore, the company has a covered ratio of 7.71.

Stretched Valuation

In terms of non-GAAP forward p/e, ABEV is currently trading at 22.59x, 7.6% higher than the industry average 21.01x. Its forward price/sales multiple of 3.74 is 128.5% higher than the industry average of 1.64. Also, its forward ev/sales ratio of 3.51 is 61% higher than the industry average  2.18.

Consensus Price Target and Rating Indicate Potential Downside

Of the two Wall Street analysts that rated the stock, one rated it Hold while one rated it Sell. ABEV has an average 12-month price target of $2.28, indicating a potential downside of 16.2%.

POWR Ratings Reflect Uncertain Prospects

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

ABEV has an A grade for Quality, but C for Value, Stability, and Sentiment. Despite its relatively higher valuation, the company’s earnings and revenues are expected to decline in the about-to-be-reported quarter (ended December 2020), making its ongoing bull run unstable. This justifies the company’s Stability, Sentiment, and Value grades, while its impressive yearly financials are in sync with the Quality grade.

ABEV is ranked #9 of 35 stocks in the C-rated Beverages industry. In addition to the grades we’ve  highlighted, one can check out additional ABEV Ratings for Momentum and Growth here.

There are five stocks in the Beverages industry with an overall rating of A or B. Click here to view them.

Bottom Line

ABEV is undoubtedly one of the biggest beverage companies operating in the Americas. However, because  its headquarters and significant operational volume are in Latin America, the company’s growth prospects and turnover are heavily dependent on the continent’s economic recovery from the coronavirus pandemic. Thus, we think investors should wait until Brazil flattens its COVID-19  infection curve and enters a recovery phase before investing in the stock.

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ABEV shares were trading at $2.73 per share on Tuesday afternoon, up $0.03 (+1.11%). Year-to-date, ABEV has declined -10.35%, versus a 5.78% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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