Standing out among the Street's worst performers today is Ambev S.A., a alcoholic beverages company whose shares slumped -4.3% to a price of $2.81, 16.22% below its average analyst target price of $3.36.
The average analyst rating for the stock is hold. ABEV underperformed the S&P 500 index by -4.9% during today's morning session, but outpaced it by 25.9% over the last year with a return of 8.1%.
Ambev S.A., through its subsidiaries, produces, distributes, and sells beer, draft beer, carbonated soft drinks, other non-alcoholic beverages, malt, and food products. The company is in the consumer defensive sector. It markets so-called staple goods and services that consumers tend to purchase regardless of their discretionary income. Thus, sales revenue tends to remain relatively unchecked by economic downturns, which in turn can contribute to share price stability. The flipside is that defensive stocks may see comparatively little growth during periods of economic growth.
Ambev S.A.'s trailing 12 month P/E ratio is 21.3, based on its trailing Eps of $0.16. The company has a forward P/E ratio of 23.5 according to its forward Eps of $0.13 -- which is an estimate of what its earnings will look like in the next quarter. As of the third quarter of 2022, the average Price to Earnings (P/E) ratio for US consumer defensive companies is 24.21, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (Eps), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
To better understand ABEV’s valuation, we can divide its price to earnings ratio by its projected five-year growth rate, which gives us its price to earnings, or PEG ratio. Considering the P/E ratio in the context of growth is important, because many companies that are undervalued in terms of earnings are actually overvalued in terms of growth.
Ambev’s PEG is 2.07, which indicates that the company is overvalued compared to its growth prospects. Bear in mind that PEG ratios have limits to their relevance, since they are based on future growth estimates that may not turn out as expected.
An analysis of the company's gross profit margins can help us understand its long term profitability and market position. Gross profits are the company's revenue minus the cost of goods only, and unlike earnings, don't take into account taxes and overhead. Here's an overview of Ambev S.A.'s gross profit margin trends:
- 2021 gross margins: 51.1 %
- 2020 gross margins: 53.6 %
- 2019 gross margins: 58.3 %
- 2018 gross margins: 61.7 %
- Average gross margin: 56.2 %
- Average gross margin growth rate: -6.1 %
- Coefficient of variability (lower numbers indicating more stability): 8.4 %
We can see from the above that Ambev's gross margins are very strong. Potential investors in the stock will want to determine what factors, if any, could derail this attractive growth story.
Companies have many costs that arise independently from their core business: cost of maintaining debt, rent payments, capital expenditures, depreciation, etc. When all of these separate cash flows are taken into account, we are left with the company's free cash flow, which for Ambev was $15,223,838,000.00 as of its last annual report.
Over the last 4 years, the company's average free cash flow has been $14,368,473,750.00 and they've been growing at an average rate of 1.3%. With such strong cash flows, the company can not only re-invest in its business, it can afford to offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in ABEV have received an annualized dividend yield of 16.7% on their capital.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts). Ambev s.a.'s P/B ratio of 0.5 indicates that the market value of the company is less than the value of its assets -- a potential indicator of an undervalued stock. The average P/B ratio of the Consumer Defensive sector was 4.09 as of the third quarter of 2022.
Ambev is likely undervalued at today's prices because it has a lower P/E ratio than the sector average, an exceptionally low P/B ratio, and a steady stream of strong cash flows with a flat trend. The stock has mixed growth indicators because of its consistently strong gross margins that are shrinking, and an above average PEG ratio. We hope this preliminary analysis will encourage you to do your own research into ABEV's fundamental values -- especially their trends over the last few years, which provide the clearest picture of the company's valuation.
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