Long-term yields for U.S. Treasuries should indeed firm but be tempered by a slowing as this phase o...
Sell AmBev (ABV)
04/29/2011 3:02 pm EST
Considering all the headwinds, shares of Companhia de Bebidas das Americas, better known as AmBev (ABV), have done just fine this year.
The headwinds include rising prices for the raw materials that go into the company’s beer. And rumors that a big international competitor such as SABMiller will buy Brazil’s second largest brewer Primo Schincariol Industria de Cervejas e Refrigerantes and put big money into taking some of AmBev 70% market share in Brazil. And, the biggest headwind of all, fears that the government of President Dilma Rousseff is losing the fight against inflation.
That last fear has pushed Brazil’s Bovespa down 5.2% this year.
In contrast shares of AmBev (ABV) are up 4.96% for the year. As I said, considering the headwinds, just fine.
Part of that out performance comes from AmBev’s strong moves to fix a cost problem that popped up in the middle of 2010. Raw materials prices had climbed so fast that the company hadn’t raised prices fast enough to keep pace. The company bit the bullet in the fourth quarter of 2010 (reported on March 3) and raised prices by 9%. That did, as I’m sure the company had feared, cut volume growth from 8.5% in the fourth quarter of 2009. But volume growth still came in positive for the quarter at 2.7%. Combine that volume growth with the price increase and revenue climbed 12% from the fourth quarter of 2009. The company’s profit margin increased by 3.1 percentage points.
With that problem fixed, I think investors can focus on how strong they think the headwinds will blow for the rest of 2011. (And you’ll need to add another headwind: A change in the tax for beer, water, and soft drinks in Brazil that will increase AmBev’s tax by about 15% this year. Recouping that increase would require another 1.5% price increase.)
I think worries about inflation in Brazil will limit gains for all Brazilian stocks until the government and central bank can demonstrate that their policies are working. (For more on Brazil’s turn for the worse on inflation policy see my post http://jubakam.com/2011/04/brazils-central-bank-goes-soft-on-inflation-and-raises-rates-by-just-0-25-percentage-points/ ) I think that will take a good three to six months—at least. In that period I’d be looking to build positions in Brazilian stocks for 2012 but I certainly wouldn’t be looking to get out performance from the Bovespa.
From that point of view, I don’t think the question is whether AmBev deserves a place in your portfolio—I think the biggest brewer in Latin America is a key holding to profit from rising incomes in the continent’s economies—but what place it deserves. I think you’ll be quite happy with the stock over the next 6 to 12 months if you think of it, and give it a slot in your portfolio, as a total return or dividend-income stock. The shares are likely to pay a projected dividend yield of 5.8% this year, according to Morningstar. (Why a projected yield? A good piece of the dividend is in the form of a special dividend that varies with the company’s profits.) On the other hand, if you slot this in your portfolio as a growth stock, I think you’re likely to be disappointed with AmBev in 2011.
So I’m going to make a switch and move AmBev from my Jubak’s Picks portfolio http://jubakpicks.com/ Dividend Income portfolio http://jubakpicks.com/. The software on the JubakPicks.com site isn’t really set up for this kind of switch so I’m going to have to do it in two parts. Today, April 29, I’m selling AmBev out of the Picks portfolio with a gain of 56.6% since I added it to that list on January 13, 2010. On Monday (assuming markets aren’t nuts), I’ll add it to the dividend portfolio. Watch for the buy.
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 March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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