There's no denying its long history as a blue chip name. Its products are sold all over the world and have been for the past several decades. Right now and for the foreseeable future though, Ambev S.A.(NYSE: ABEV) -- you may know it better as the parent to beer company Anheuser-Busch -- could prove a tough stock to stick with.
That's the takeaway from recent and forward-looking data regarding the beer industry anyway, underscored by Ambev's slowing growth and increasing pressure on its profit margins.
Beer headwinds are blowing
Don't misunderstand: The beer business is hardly dying. It's not exactly thriving at this time, either. The Brewers Association reports beer sales (revenue but not necessarily volume) in the United States were up a modest 1% in 2022.
And that was before price hikes went into effect late in the year. Nielsen and Bump Williams Consulting report the nation's beer headwinds turned more brisk in the final weeks of 2022 with sales volumes falling after prices finally pushed many consumers to explore other beverage options. Let's presume the rest of the world is feeling similar pain.
Things should start improving this year but only slightly. Most outlooks for the beer business call for forward-looking sales growth rates in the low single digits, though that still doesn't guarantee earnings growth. As Just Drinks' deputy editor James Beeson predicts, the industry should see "spot prices peak" in 2023 while "inflationary headwinds" are likely to persist.
The ultimate end result? The continued waning of brand loyalty and/or trading down due to price.
To its credit, Ambev is responding to the new dynamic. During its third-quarter conference call, management made repeated mention of ensuring "great price execution with the right SKUs at the right price."
There aren't too many details about what that exactly means, however, nor does it ensure the brewer's measures will prove effective. Anheuser-Busch is the biggest beer company in the world, and it got that way by brewing in bulk and bottling (or canning) the same product in the same way over and over again. Even merely tweaking this approach is no easy task when an operation is as enormous as this one.
The analyst community isn't exactly optimistic, either. Although these professionals do rate its stock at a little better than a hold and collectively deem shares are worth roughly 40% more than their present prices, these same analysts don't believe Ambev S.A. is apt to restore and then start growing its bottom line again until well into next year. Some of the beer giant's current customers may find a competing product they like better before then, prompting new and unexpected pressures on profit margins.
Data source: Thomson Reuters. Chart by author. All data is in Brazilian real. Revenue figures are in millions.
And of course, this rekindled profit growth is also predicated on the assumption that revenue will grow as expected and brewing costs will be contained. That may not be the way things pan out, though. Again, as Just Drinks' Beeson notes, brewing costs are still high, and consumers are still looking to lower their bar tabs.
Not enough reward (compared to risk) for newcomers
Does this make Ambev a holding you absolutely must sell if you currently own it? No. Much of the prospective damage has already been done. Shares are already back to multiyear lows, and while the beer market itself isn't firing on all cylinders, it's a highly cyclical one. Beer drinkers are apt to come back around again as tastes and the economic backdrop change.
This company's a solid, dividend-paying cash cow in the meantime, sporting a current yield of 5.9%. Not bad.
If you're on the fence about holding it or buying it, though, the foreseeable future could be tough. The stock's recent decline is the market's way of saying it sees more headwinds on the horizon. Even if dividend income is your goal, there are better options out there right now.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
