What Recession? Have a Beer!

01/06/2009 10:17 am EST


Nick Lanyi

Editor, High-Yield International

Nick Lanyi, editor of High-Yield International, says beer drinkers don’t let a recession stop them, and he likes a local favorite in Latin America.

Compania Cervecerias Unidas (United Breweries Company) (NYSE: CCU) is the largest beer maker in Chile and the second-largest in Argentina. The company also distributes soft drinks, sports drinks, wine, spirits, mineral water, and other beverages in both countries, where it is the licensed distributor for Anheuser-Busch, PepsiCo, Schweppes, Guinness, and others.
CCU dominates Chile's beer market with an 85% market share, thanks to Cristal, by far Chile's #1 beer. The company also has a 65% share of the mineral water market in Chile and a 45% share of the market for Pisco, a popular brandy-like liquor.

About a third of CCU's revenue comes from its beer business in Chile, [while] a quarter comes from nonalcoholic drinks, 17% from its beer business in Argentina and about 16% from its wine business—which is mostly centered in Chile.

Compania Cervecerias Unidas' semi-annual dividend tripled between 2004 and 2007, and this year it rose +45%. The stock yields 7.8% at current prices.

Chile requires corporations to make distributions to shareholders of at least 30% of their net profits. The company's current payout is covered by current cash flows. Unfortunately, Chile has a high withholding rate of 35% for foreign investors. This amount can be recovered by US investors by filing IRS Form 1116.

Although competition in Chile and Argentina is heavy, the company has extremely well-established brands and superior distribution, making it difficult for competitors to make significant headway.

It is also benefiting from economic growth in Chile and Argentina. Sales have doubled over the past four years. Although the recession will dampen growth in both countries for the next two or three quarters, it should stay positive, as beer sales tend to hold up very well during recessions.

Analysts estimate 8% annual increases in revenue over the next several years, thanks to population and income growth and rising sales for some of its higher-priced items, such as iced tea drinks. Earnings [growth is] estimated to continue at a 5% pace over the long term. This should help support steadily rising distributions.

The stock has sold off due to the weakening Chilean economy and the weakness in the Chilean peso against the dollar over the past several months. Over the next year, I expect the peso to rally as investors slowly sell their US Treasury bills and diversify into emerging markets again—a trend that has already showed nascent signs of establishing itself.

At recent prices, the stock trades at only 13x expected earnings for 2008. (It closed at $28.44 Monday—Editor.) Compania Cervecerias Unidas is a solid choice for income investors who can tolerate some risk given its exposure to emerging markets.

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