Aging Demographics And FX Woes Will Weaken Beverage Revenues

Key Takeaways

• Demographic shifts, health trends, and stricter regulations are eroding demand and margins across CCU's core beverage categories.
  
• Currency volatility, higher packaging costs, and increased competition threaten profitability and long-term market share.
  
• Strong brand power, cost efficiencies, diversification, and strategic innovation position CCU for resilient growth and margin stability despite regional and industry challenges.

Catalysts

Operates as a diversified beverage company in Chile, Argentina, Bolivia, Colombia, Paraguay, and Uruguay.

• Rapidly aging populations and declining birth rates in core Latin American markets threaten to structurally reduce per capita demand for alcoholic beverages, undermining long-term volume growth and ultimately putting downward pressure on CCU's consolidated revenues.
  
• Intensifying health consciousness and government intervention-through stricter regulations and new taxes targeting alcohol and sugary drinks-are likely to accelerate shifts in consumer preferences away from CCU's core beer and soft drink categories, compressing net margins and lowering sales growth.
  
• Ongoing currency volatility and macroeconomic instability in Argentina and Chile expose CCU to significant FX headwinds, as local currency devaluations erode the value of international segment revenues and disrupt pricing power, limiting the company's capacity to defend operating margins.
  
• The transition to mandatory recycled PET (r-PET) packaging laws in Chile has resulted in a major structural increase in manufacturing costs, with management acknowledging it is difficult to fully pass these costs onto consumers, risking further gross margin contraction in the company's largest segment.
  
• Slow adaptation to new beverage trends, combined with mounting competition from larger global brewers and insurgent craft brands, is projected to weigh on CCU's market share and pricing power in premium, craft, and alternative beverage segments, potentially causing sustained stagnation or decline in EBITDA and earnings over the long-term.

Compañía Cervecerías Unidas Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Compañía Cervecerías Unidas compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Compañía Cervecerías Unidas's revenue will grow by 6.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 5.0% today to 5.1% in 3 years time.
• The bearish analysts expect earnings to reach CLP 185.6 billion (and earnings per share of CLP 502.95) by about August 2028, up from CLP 150.3 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 11.4x on those 2028 earnings, down from 14.2x today. This future PE is greater than the current PE for the US Beverage industry at 10.6x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.7%, as per the Simply Wall St company report.

Compañía Cervecerías Unidas Future Earnings Per Share Growth

Risks

• Strong brand equity and pricing power in Chile have allowed CCU to raise prices above inflation and recover or maintain market share even in a challenging industry context, supporting resilient revenues and stable or expanding margins.
  
• The company's ongoing efficiency initiatives, including supply chain and working capital improvements as well as digital transformation, are reducing costs and improving operating leverage, creating durable upward pressure on EBITDA and net income.
  
• Diversification across operating segments (beer, nonalcoholic beverages, spirits, and wine), geographic expansion, and recovery in export volumes help offset regional risks, boosting overall revenue stability and earnings resilience.
  
• Recovery in Argentina-if macroeconomic stabilization and consumer purchasing power rebound as anticipated-could allow CCU to regain pricing discipline and profitability, leading to revenue and margin improvement in a currently challenged market.
  
• Strategic investment in sustainability (such as PET recycling in compliance with r-PET law), new product innovation, and a focus on premium and ready-to-drink categories position CCU to benefit from evolving consumer preferences, likely enhancing long-term revenue growth and gross margin.

Valuation

• The assumed bearish price target for Compañía Cervecerías Unidas is CLP4350.24, which represents two standard deviations below the consensus price target of CLP6402.11. This valuation is based on what can be assumed as the expectations of Compañía Cervecerías Unidas's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CLP7890.0, and the most bearish reporting a price target of just CLP4200.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be CLP3618.4 billion, earnings will come to CLP185.6 billion, and it would be trading on a PE ratio of 11.4x, assuming you use a discount rate of 9.7%.
  
• Given the current share price of CLP5781.0, the bearish analyst price target of CLP4350.24 is 32.9% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.