PepsiCo License In Paraguay And Danone Partnership Will Improve Production And Efficiency

Key Takeaways

• Strategic partnerships and expansions in production capacity are expected to drive revenue growth through increased market reach and operational efficiencies.
  
• Digital transformation and sustainability initiatives aim to improve earnings and net margins by enhancing efficiencies and supporting premium brand positioning.
  
• CCU faces challenges in Argentina and Chile due to economic issues impacting volumes and revenue, currency depreciation affecting margins, and limited pricing flexibility.

Catalysts

Operates as a multi-category beverage company in Chile, Argentina, Bolivia, Colombia, Paraguay, and Uruguay.

• CCU's strategic partnership with the Vierci Group to include the PepsiCo license in Paraguay is expected to increase revenues due to expanded production and distribution capabilities for beverages and snacks in the region.
  
• The consolidation and synergy benefits of the joint water business, Aguas de Origen, with Danone in Argentina, are anticipated to drive revenue growth and improve net margins by optimizing operational efficiencies.
  
• Continued investment in digital transformation aims to enhance sales execution and operational efficiencies, likely improving future earnings and net margins.
  
• Expansion of production capacity through new initiatives like the CirCCUlar PET recycling plant is expected to support sustainability objectives while contributing to cost efficiencies, likely benefiting net margins.
  
• The focus on premium brand positioning and innovation, particularly in the Chilean and export wine markets, is expected to drive revenue growth and improve earnings through higher average selling prices and brand differentiation.

Compañía Cervecerías Unidas Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Compañía Cervecerías Unidas's revenue will grow by 10.5% annually over the next 3 years.
• Analysts are assuming Compañía Cervecerías Unidas's profit margins will remain the same at 5.1% over the next 3 years.
• Analysts expect earnings to reach CLP 174.0 billion (and earnings per share of CLP 471.97) by about February 2028, up from CLP 128.5 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.4x on those 2028 earnings, down from 17.7x today. This future PE is greater than the current PE for the US Beverage industry at 12.7x.
• 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 10.29%, as per the Simply Wall St company report.

Compañía Cervecerías Unidas Future Earnings Per Share Growth

Risks

• CCU faced significant challenges in Argentina, with low 20s contraction in the beer and water industries, impacting volumes and revenue in that segment. Additionally, any recovery to 2023 volume levels may take 2-3 years, reflecting ongoing macroeconomic issues in Argentina. [(impacting revenue and potentially earnings)].
  
• In Chile, the economic growth is expected to be modest at around 2% long-term, leading to soft or flat growth in the beer market. This limits potential revenue growth and may impact overall profitability. [(impacting revenue growth)].
  
• There are cost and expense pressures stemming from the depreciation of local currencies against the U.S. dollar, which may affect the company's net margins if not sufficiently offset by price increases. [(impacting net margins and earnings)].
  
• Price elasticity concerns in Chile suggest that there may be limited room for price increases without impacting volumes, especially given the soft industry outlook. [(impacting pricing strategy and revenue)].
  
• CCU’s wine exports have not yet recovered to pre-pandemic levels, being 13% below 2019 volumes, which constrains growth despite some recovery seen in 2024. [(impacting export revenues)].

Valuation

• The analysts have a consensus price target of CLP5770.0 for Compañía Cervecerías Unidas 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 CLP7000.0, and the most bearish reporting a price target of just CLP4200.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CLP3383.2 billion, earnings will come to CLP174.0 billion, and it would be trading on a PE ratio of 16.4x, assuming you use a discount rate of 10.3%.
  
• Given the current share price of CLP6141.0, the analyst price target of CLP5770.0 is 6.4% lower. 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.