Currency Depreciation Will Pressure Margins, But Regional Expansion Will Offer Opportunities

Key Takeaways

• Currency depreciation and input cost pressures could impact net margins without corresponding revenue increases, affecting overall financial performance.
  
• Macro challenges in Argentina and modest growth in Chile could limit revenue growth and earnings, with potential volume declines from price increases challenging net margins.
  
• CCU's strategic initiatives improved financial results amid challenging conditions, with partnerships and digital transformations enhancing resilience and potential for future margin growth.

Catalysts

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

• CCU anticipates continued cost and expense pressures due to local currency depreciation against the U.S. dollar, which might impact net margins by increasing input costs without a corresponding increase in revenues.
  
• The beer and water industries in Argentina faced significant volume contractions, which, if persisting, could affect future revenue growth and overall earnings for CCU in that market.
  
• CCU's future growth in the Chilean beer market might be limited to low single-digit growth due to modest economic projections, potentially impacting revenue growth and limiting the ability to leverage scale.
  
• Argentina's macroeconomic challenges, including hyperinflation and structural adjustments, could delay the recovery of sales volumes, impacting revenue and earnings in the medium term.
  
• Systematic price increases, needed to recover margins, might face elasticity challenges, particularly in competitive markets, potentially affecting net margins if price increases lead to volume declines.

Compañía Cervecerías Unidas Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Compañía Cervecerías Unidas's revenue will grow by 5.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 5.5% today to 5.3% in 3 years time.
• Analysts expect earnings to reach CLP 180.2 billion (and earnings per share of CLP 465.88) by about May 2028, up from CLP 160.9 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.9x on those 2028 earnings, up from 16.7x today. This future PE is greater than the current PE for the US Beverage industry at 14.0x.
• 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 9.84%, as per the Simply Wall St company report.

Compañía Cervecerías Unidas Future Earnings Per Share Growth

Risks

• CCU delivered higher financial results in 2024 compared to 2023, driven by a strong turnaround in the second half and effective revenue management initiatives that improved EBITDA and net income, positively impacting earnings.
  
• The company strengthened its regional footprint through strategic partnerships and consolidations in Argentina and Paraguay, potentially increasing synergies and contributing to revenue growth.
  
• Despite a challenging economic environment in Chile and Argentina, including currency depreciation, CCU managed to achieve positive EBITDA and net income growth through strategic initiatives, indicating resilience that could support margins.
  
• Investments in brand preference and digital transformation efforts could enhance sales execution and operational efficiencies in the future, benefiting revenue and net margins.
  
• The successful implementation of the HerCCUles plan led to a significant recovery in financial results, suggesting that ongoing strategic plans may continue to drive profitability and earnings despite external challenges.

Valuation

• The analysts have a consensus price target of CLP6239.0 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 CLP7890.0, 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 CLP3425.7 billion, earnings will come to CLP180.2 billion, and it would be trading on a PE ratio of 16.9x, assuming you use a discount rate of 9.8%.
• Given the current share price of CLP7275.0, the analyst price target of CLP6239.0 is 16.6% 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.