Long-term drivers remain intact, and we expect the company's wide economic moat to ensure that current headwinds are temporary.
For the second consecutive quarter, AB InBev
suffered severe weakness in Brazil that caused consolidated earnings to undershoot our expectations. Management has slightly lowered revenue guidance and is now unlikely to meet our full-year estimates, and we have trimmed our margin forecasts for 2016. Nevertheless, we expect the company's wide economic moat to ensure that current headwinds are temporary. We are maintaining our long-term assumptions of 4.5% organic revenue growth and a near-39% operating margin intact, so the impact on our EUR 112 and $126 fair value estimates for the ordinary shares and ADRs is immaterial.
Philip Gorham, CFA, FRM, is director of equity research for Ibbotson Associates Japan,subsidiary of Morningstar.
Brazil remains incredibly weak for AB InBev and its majority-owned subsidiary Ambev. Regional organic volumes declined 5.1% in the third quarter, with beer volumes falling 4.1%, despite the benefit of the Olympics being held in Rio de Janeiro in August. Price/mix was also negative, down 1.2% in the quarter. We believe recent volume declines are linked to the weakness in the Brazilian economy, as well as the continued pressure on consumer disposable incomes. Negative pricing is a divergence from the company's stated strategy of pricing in line with the consumer price index in Brazil, which is currently running at around 8.5%, and will raise eyebrows. We do not believe the pricing model is broken, however, for two reasons. First, mix likely played a large part in the decline, as premiumisation often reverses in economic downturns and consumers temporarily switch to smaller pack sizes. Second, the shift to returnable bottles, which now account for 26% of Brazilian volume, is weighing on revenue growth. We expect this negative mix effect to eventually plateau and provide a margin-enhancing platform for growth.
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