Beer Beats Oil as AmBev Value Rises Toward Top: Corporate Brazil

Brewer Cia. de Bebidas das Americas is climbing the ranks of Brazil’s largest companies by market value as a growing consumer market in the world’s second-biggest emerging economy swells sales of Brahma beer and Guarana soda.

AmBev’s stock capitalization rose 49 percent over the past year to 209.3 billion reais ($101.4 billion) on June 15. The Brazilian unit of Anheuser-Busch InBev NV (ABI) overtook Vale SA (VALE3) as Brazil’s second-biggest company on March 26, and fell back behind the iron-ore producer on June 15. It pared the gap with front-runner Petroleo Brasileiro SA (PETR4) to 33.7 billion reais as of June 14, the narrowest in nine years.

The brewer is attracting investors seeking to avoid companies, including commodity producers, whose business is more tied to swings in the global economy. AmBev says it makes seven out of 10 beers sold in Brazil, giving it control of a market that’s resistant to slowing growth.

“AmBev is almost a defensive stock, as its sales aren’t affected significantly by the external crisis,” said Felipe Casotti, a portfolio manager at Maxima Asset Management in Rio de Janeiro who oversees 800 million reais in assets. “We can’t say the same for commodities producers, which suffer the most in times like now.”

The Standard & Poor’s GSCI index of 24 commodities has dropped 11 percent this year, and oil has declined 16 percent, amid mounting concern that Europe’s debt crisis will lead to a global slump. Brazil’s retail sales of food, beverages and tobacco haven’t posted an annual drop in any month since 2009.

Share Comparison

AmBev shares have advanced 13 percent this year as it reported sales rose 7.5 percent in 2011 to 27.1 billion reais. Vale climbed 2.1 percent, Petrobras has tumbled 14 percent and the benchmark Bovespa stock index has declined 1.4 percent.

The beer maker’s revenue will grow 12 percent this year, according to the average of 11 analysts’ estimates compiled by Bloomberg. The company reported a 35 percent return on equity in the first quarter, beating the average of 21 percent among the 100 biggest beverage companies by market value, according to data compiled by Bloomberg.

The Sao Paulo-based company was formed in 1999 after Cia. Cervejaria Brahma bought competitor Cia. Antarctica Paulista, creating Brazil’s biggest brewer. Its soft-drink division is also the biggest bottler for PepsiCo Inc. outside the U.S., according to the company’s website.

AmBev declined to comment in an e-mailed response to questions.

Buying on Credit

While sales of consumer goods such as cars and home appliances may be curbed by household debt equal to a record 43 percent of annual income, beverages sales aren’t affected, giving AmBev an edge over other consumer stocks, said Renato Prado, an analyst at Sao Paulo-based Fator Corretora.

“Beverage sales don’t depend on credit growth, unlike other goods, such as kitchen appliances, TV sets, or cars,” said Prado, who rates the stock buy. “So slower credit growth doesn’t make much difference for AmBev.”

Six out of 17 analysts surveyed by Bloomberg rate AmBev a buy, and 10 recommend holding the stock. While the company has a dominant position in an expanding industry, the share price already reflects that growth potential, said Caue Pinheiro, a consumer analyst at SLW Corretora brokerage.

AmBev’s Valuation

“The stock has performed well this year, partially because its low indebtedness level and steady cash flow look more appealing when the market is doing poorly,” Pinheiro, who rates the stock hold, said in a phone interview from Sao Paulo. “Shares wouldn’t have reached current prices so fast if it weren’t for this environment, which is bad for the market in general, but good for a company such as AmBev.”

Brazil’s economy expanded 2.7 percent last year, the second-worst performance since 2003. Analysts surveyed by the central bank have cut their 2012 growth forecasts for five straight weeks, to 2.53 percent. Even as growth slows, Brazil’s unemployment was 6 percent in April, down from as high as 10.8 percent in July 2006, and retail sales are up from a year ago.

AmBev’s debt load is equivalent to 0.28 times trailing 12- month earnings, compared with an average ratio of 5.45 for the 68 companies on the Bovespa index.

The brewer’s shares trade at 26.6 times reported earnings, after reaching 29 times on April 20, the highest in four years, according to data compiled by Bloomberg. That compares with 24.7 for the nine members of the MSCI Brazil/Consumer Staples Index. Vale’s ratio is 6, while the gauge for Petrobras shares is 7.7.

Beverage Spending

“AmBev is not really a bargain right now,” Pinheiro said.

As AmBev benefits from growing consumer spending, Vale and Petrobras must cope with increasing interference from the government, said Wagner Salaverry, a partner at Porto Alegre- Brazil based Geracao Futuro Corretora de Valores SA.

Petrobras shares have dropped this year as President Dilma Rousseff’s administration pressures the company to limit fuel- price increases to avoid adding to inflation, Salaverry said. Vale, which has Brazil’s state-run development bank BNDES among its controlling shareholders even after it was privatized in 1997, is in a tax dispute with Brazilian authorities, which has contributed to the stock’s decline, Salaverry said.

Government Interference

“The government seems to be more concerned about its own goals than about minority shareholders’ interests,” Salaverry said in a phone interview.

Petrobras and Vale declined to comment, according to e- mailed statements sent by the companies’ press offices. The presidential press office also declined to comment.

Brazilian businesses partly owned by the government have led the rankings of the country’s biggest companies for at least 12 years, according to data compiled by Bloomberg.

AmBev may surpass Petrobras in market capitalization in the long run as spending on beverages rises, said Henrique Kleine, the chief analyst at Magliano SA brokerage. Demand is increasing after the country’s middle class, defined as households with annual incomes of at least 12,000 reais, swelled by 31 million in the past decade, according to the Strategic Affairs Ministry.

“The government is lowering interest rates and cutting taxes to boost domestic consumption, which makes a company like AmBev very attractive,” Klein, who recommends buying the stock, said by phone from Sao Paulo. “Given how well the company is managed and how big its brands are in the Brazilian market, shares can go even higher.”

To contact the reporter on this story: Ney Hayashi in Sao Paulo at ncruz4@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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