Message in a Bottler

 | Nov 14, 2011 | 11:30 AM EST  | Comments
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Stock quotes in this article:

bud

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abv

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cch

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pep

It's hard to make bottlers sound sexy.

The coolest one I ever saw was outside of Kiev, in the Ukraine, as a guest of Coca-Cola Hellenic Bottling Company S.A. (CCH) in the late 1990s. We were flown in on a private plane, and several groups of little girls waved flags at our Coca-Cola bus as we passed by. The "highlight" of the trip was being trapped in a room listening to a two-hour speech by a former Ukrainian prime minister as Coca-Cola jingles played in the background.

I've never visited Companhia de Bebidas Das Americas (ABV), or AmBev, a subsidiary of another global company, Anheuser-Busch InBev (BUD), but as the biggest brewery in South America and the fifth-largest brewery in the world, I'm sure it could put on an impressive show. But more importantly, bottlers like AmBev are among the steadiest, most reliable growth businesses you can find in volatile emerging markets.

AmBev operates in 14 countries and is the leading brewer in Brazil, Canada, Argentina, Paraguay, Uruguay and Bolivia. Its beer offerings include Antarctica, Brahma, Bohemia, Labatt, Pilsen, Skol, and Stella Artois. For all its geographic diversity, much of AmBev's focus is on Brazil -- the world's third-largest beer market. AmBev controls 70% of Brazil's beer market and around 40% of its total beverage market.

The bottler is also the largest PepsiCo (PEP) bottler outside the U.S., and sells and distributes PepsiCo products in Brazil and other Latin American countries. Its portfolio includes Pepsi, Lipton Ice Tea and Gatorade. It also includes the international soft drink brand Guarana Antarctica, which is made from a native fruit of the Amazon forest and the best-selling soft drink in Brazil behind Coca-Cola.

By selling higher-margin premium products, AmBev is remarkable at generating shareholder value. Average businesses typically offer a 12% return on equity (ROE). Terrific businesses generate more than 15%. AmBev's ROE was double that figure -- more than 32% -- in 2010.

AmBev announced solid third-quarter results last week. Net sales grew 10.6% and volumes increased 2.9% across all regions. EBITDA grew by 13.5%, while margin continued to expand, hitting 46.3% in the period. Cash generated from operations grew by 32.9% compared with the same period in 2010. These are all very solid numbers.

The stock is currently bouncing from an oversold position. As the fourth quarter tends to be strongest in emerging markets, I expect AmBev to move up strongly between now and the end of the year.

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