Ambev S.A.'s (BVMF:ABEV3) Price Is Out Of Tune With Earnings

With a price-to-earnings (or "P/E") ratio of 13x Ambev S.A. (BVMF:ABEV3) may be sending bearish signals at the moment, given that almost half of all companies in Brazil have P/E ratios under 8x and even P/E's lower than 6x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

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Ambev could be doing better as it's been growing earnings less than most other companies lately. It might be that many expect the uninspiring earnings performance to recover significantly, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Ambev

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Ambev.

Is There Enough Growth For Ambev?

There's an inherent assumption that a company should outperform the market for P/E ratios like Ambev's to be considered reasonable.

Retrospectively, the last year delivered a decent 2.9% gain to the company's bottom line. The solid recent performance means it was also able to grow EPS by 10.0% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Turning to the outlook, the next three years should generate growth of 8.7% per year as estimated by the analysts watching the company. That's shaping up to be materially lower than the 16% per annum growth forecast for the broader market.

With this information, we find it concerning that Ambev is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Bottom Line On Ambev's P/E

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Ambev's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Ambev, and understanding should be part of your investment process.

If you're unsure about the strength of Ambev's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.