The firm's wide economic moat in a fairly stable category should make the underlying business more stable than most throughout the turbulence in Brazil.
We think it is likely that the market is throwing the baby out with the bath water after selling off Ambev
shares, which fell 6% last week following the latest political scandal in Brazil, and we are not making any changes to our near-term assumptions. We think Ambev’s wide economic moat in a fairly stable category should make the underlying business more stable than most throughout the turbulence, and we are retaining our BRL 19 fair value estimate for the time being. The drop in the value of the Brazilian real against the U.S. dollar is a negative for our valuation of the ADRs, but the impact is not material and we are also retaining our $6 fair value estimate. We are also maintaining our valuation of Anheuser Busch InBev, whose exposure to Brazil through its 62% stake in Ambev is diluted by its broader geographic footprint. After strong rallies, we now see limited upside to both companies.
Philip Gorham, CFA, FRM, is director of equity research for Ibbotson Associates Japan,subsidiary of Morningstar.
After a solid first quarter, in which beer volumes in Brazil returned to positive territory, the latest political crisis that has engulfed President Michel Temer is an unwanted setback. Whether or not he is removed from office, a weakened Temer is less likely to push through the economic and structural reforms the market was hoping for, in our opinion, and the market’s disappointment is understandable.
However, Ambev operates in a defensive category in which demand is driven by GDP growth. It remains to be seen what the economic implications of this latest political crisis are, if any, but for as long as GDP continues to recover, we remain confident in our 5% sales growth estimate for this year. We think beer demand in Brazil is more sensitive to global demand for commodities than it is to domestic political volatility, and in that regard, several leading indicators are positive. Some of Brazil’s key export commodities, including iron ore and oil, while down from their late first-quarter highs, remain above the levels of last year, which should support GDP growth.
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