BEES And Ze Delivery Will Monetize The Beverage Ecosystem

Key Takeaways

• Ambev's digital transformation initiatives like BEES and Ze Delivery aim to enhance customer interactions and potentially boost revenue through ecosystem digitization.
  
• Focus on non-alcoholic beer growth and strategic marketing is expected to improve sales margins and brand health, positively impacting profitability.
  
• Significant tax headwinds and cost challenges in Brazil, along with declining volumes and execution risks, could pressure margins and revenue growth.

Catalysts

Through its subsidiaries, engages in the production, distribution, and sale of beer, draft beer, carbonated soft drinks, malt and food, other alcoholic beverages, and non-alcoholic and non-carbonated products in Brazil, Central America and Caribbean, Latin America South, and Canada.

• Ambev's digital transformation through its B2B platform, BEES, and DTC platform, Ze Delivery, positions it to optimize customer interactions and potentially increase revenue as it digitizes and monetizes its ecosystem.
  
• The potential growth in the non-alcoholic beer segment driven by brands like Corona Cero and Budweiser Zero represents a new revenue stream that could boost overall sales and margins.
  
• Ambev's focus on productivity and cost management amidst input cost pressures is expected to result in margin expansion, which should positively impact earnings.
  
• The expansion of Ambev's marketplace and third-party product offerings in Brazil could increase GMV while leveraging existing infrastructure to offer favorable ROIC, impacting revenue and efficiency positively.
  
• Ongoing strategic investments in marketing, especially with mega brands like Skol, Budweiser, and others, are expected to enhance brand health, potentially driving sales volume and improving overall profitability.

Ambev Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ambev's revenue will grow by 5.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 16.1% today to 16.8% in 3 years time.
• Analysts expect earnings to reach R$17.7 billion (and earnings per share of R$1.13) by about April 2028, up from R$14.4 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as R$15.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.0x on those 2028 earnings, up from 15.2x today. This future PE is greater than the current PE for the US Beverage industry at 15.2x.
• Analysts expect the number of shares outstanding to decline by 0.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 16.92%, as per the Simply Wall St company report.

Ambev Future Earnings Per Share Growth

Risks

• The significant tax headwinds in Brazil, along with an increase in less tax deductibility, could lead to a contraction in net profit margins.
  
• The challenging consumer environment in Argentina, with the beer industry declining in low 20s, might negatively impact revenue growth from that market.
  
• The decline in volumes of key brands like Skol could indicate waning consumer preference, potentially impacting revenue and necessitating increased marketing expenditure to regain market share.
  
• The depreciation of the Brazilian Real and increasing aluminum prices pose cost challenges that could pressure operating margins if not offset by pricing strategies or cost efficiencies.
  
• The reliance on digital initiatives to drive growth while expanding into diverse product categories (non-alcoholic, RTDs) adds complexity and execution risk, which could impact both revenues and investment returns if not managed effectively.

Valuation

• The analysts have a consensus price target of R$14.233 for Ambev based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$17.7, and the most bearish reporting a price target of just R$10.9.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$105.5 billion, earnings will come to R$17.7 billion, and it would be trading on a PE ratio of 20.0x, assuming you use a discount rate of 16.9%.
• Given the current share price of R$14.02, the analyst price target of R$14.23 is 1.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.