Drink Up Shares of AmBev

 | Dec 28, 2011 | 11:00 AM EST
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Brazil's Companhia de Bebidas Das Americas (ABV), also known as AmBev, is the biggest brewery in South America and the fifth-largest brewery in the world. It's also a subsidiary of global brewing company Anheuser-Busch InBev (BUD).

It operates in 14 countries and is the leading brewer in Brazil, Canada, Argentina, Paraguay, Uruguay and Bolivia. Its portfolio of beers includes Antarctica, Brahma, Bohemia, Labatt, Pilsen, Skol and Stella Artois.

AmBev 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 Anarctica, which is made from a native fruit of the Amazon forest and is the best-selling soft drink in Brazil behind Coca-Cola (KO).

The brewer's primary focus remains Brazil -- the world's third-largest beer market. AmBev controls 70% of the Brazilian beer market and about 40% of the total beverage market. Its dominant position in fast-growing Brazil is the key to its future pricing power.

Management has a reputation for relentless focus on maximizing profits. By selling higher-margin, premium products and constantly improving productivity and efficiency of its facilities, AmBev has become remarkable at generating shareholder value. Average businesses typically offer a 12% return on equity (ROE), and terrific businesses generate more than 15% ROE. AmBev's ROE was double that figure -- more than 32% in 2010.

Technically, the stock has done extremely well in 2011, up 20.6%, even as the broader iShares MSCI Emerging Markets Index (EEM) has fallen 18% this year and the iShares MSCI Brazilian Index (EWZ) is down more than 23%. That's just the about the strongest relative outperformance on a mega-cap emerging market stock that I've seen in all of 2011.

Trading at a forward price-to-earnings ratio of 20, AmBev is not cheap. But with sales focused on the fourth-quarter summer season (in Brazil), I expect this stock to continue moving up, slowly and steadily, into the first half of 2012.

I'm recommending AmBev as a buy, and place your stop at $31.



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