Ambev S.A.: Diversify Out Of U.S. Assets With Beer Made In Brazil

Core Argument - The US dollar's weakening value due to nearly $35 trillion in unpayable Treasury debt suggests investors should diversify portfolios overseas, with Ambev SA (ABEV) being a top foreign pick [1] - Ambev's undervaluation, combined with a weaker US dollar, could lead to a dramatic share price increase over 2-3 years, potentially doubling or tripling in price with a high 6.5% dividend payout [1] Weak Dollar Argument - Dedollarization in international trade is expected to continue over the next decade, driven by US deficit spending and potential economic recession risks [2] - The Brazilian Real has been gaining ground against the US dollar since mid-2020, with$ 1 USD now exchanging for $5.12 BRL, making foreign assets like Ambev more attractive [2] Ambev's Valuation - Ambev is currently at one of its cheapest valuations in 20 years, with a trailing dividend yield of 6.5%, the highest in the global brewery and distilled beverage industries [4] - Key financial ratios include price to trailing earnings (12.7x), sales (2.3x), cash flow (7.46x), and book value (2.26x), similar to recession lows in 2009 and 2020 [4] - Ambev's enterprise valuation metrics, such as EV to forward cash EBITDA (6.2x) and revenues (2.06x), are at 10-year lows, approaching 2009 Great Recession levels [6] Financial Metrics - Ambev's free cash flow yield is 10.1%, the highest since the 2009 global recession, and significantly higher than US large caps, which are yielding at or below 5% [7] - The company has a conservative balance sheet with more cash than debt (net$ 3 billion in cash), and gross profit margins exceeding 50% [5][8] Peer Comparison - Ambev is the least expensive major beer brewery or liquor distiller globally compared to peers like Heineken, Anheuser-Busch InBev, and Diageo [6] - Seeking Alpha's Quant Valuation Grade gives Ambev an "A," with key metrics like P/E Non-GAAP (TTM) at 12.45, 32.49% below the sector median [9] Earnings and Growth - Ambev's earnings estimates for 2024-26 show modest growth, with 2025 EPS expected to increase by 9.79% YoY, while sales are projected to grow steadily [10] - The company's stable business model and defensive nature make it desirable in a potential recession or market volatility scenario [9] Dividend Appeal - Ambev's trailing dividend yield of 6.48% is the highest since the company began paying dividends in 2006 and the strongest relative to the S&P 500 index [11] - The yield is also the highest among peer breweries and distillers, making it an attractive income investment with a sound balance sheet and strong profit margins [12] Upside Potential - A return to 10-year average financial ratios could push Ambev's share price to $4.00, offering a potential total return of +80% [15] - If the US dollar declines further and the Brazilian economy outperforms, price targets of$ 5 or $6 are possible, with total returns of +150% to +200% over 2-3 years [15] Downside Risks - A material decline in the Brazilian Real vs the US dollar or global financial turmoil could pressure Ambev's operating results and share price [14] - However, Ambev's current valuation is so cheap that it is expected to outperform the S&P 500 in a bear market scenario [14]