Update AmBev (ABV)

03/04/2011 2:02 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Oh, Canada!

Maybe AmBev (ABV) should challenge Canadians to see if they can out drink the company’s Brazilian customers.

In the just completed fourth quarter of 2010, AmBev announced on March 3, organic sales volume grew in Brazil by 3.6% and in southern Latin America by 2.6%--but fell by 5.3% in Canada. (If you own this stock, remember to ask for Labatt in Canada.) Thanks to volume growth and price increases net sales climbed by 12%.

Sales in Canada have been a problem for quarters now so this most recent decline isn’t a new problem on the downside. Neither are rising costs for raw materials such as sugar (or actually the rising cost of hedges against higher sugar prices).

What is new is worry that slowing growth in Brazil, as the government fights inflation, will cut into beer sales. For 2011 “there are some pros and cons,” CEO João Castro Neves told analysts on March 3. “A clear pro for 2011 is the low unemployment figure – the lowest we’ve ever had in Brazil.” But that’s balanced by a con since the government has decided to deliver a smaller than expected increase to the minimum wage in 2011.

Under these circumstances the company’s ability to increase EBITDA (earnings before interest, taxes, depreciation, and amortization) margins by 3.1 percentage points to 51.3% was pretty impressive. The company generated 11.5 billion reais (about $7 billion) in cash from operations for 2010. The company is required to pay out 35% of its annual net income in dividends. On February 28 the company announced that it would pay out a 1.8 billion reais dividend (about 40 cents a share) on March 22.

The stock has sold off along with the rest of the Brazilian market until it now trades at 21.6 times trailing 12-month earnings. In 2010 the price-to-earnings ratio was 23.6. The current average for the brewing industry is 27.6. As of March 4, 2011 I’m raising my target pride on these shares to $37 (from my previous target of $36) for when the emerging market tide turns toward the end of 2011. The stock is currently a member of my Jubak’s Picks medium-term portfolio http://jubakpicks.com/ .

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did not own shares of AmBev as of the end of January. For a full list of the stocks in the fund as of the end of January see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

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