Ambev Earnings: Margins Continue To Recover, but Cyclical Weakness Looms

Our hopes that Ambev's margins had bottomed out were given a boost by the company's second-quarter performance. The key financial metrics that we watch closely were mixed, with volume declining 2% year over year—a touch below our expectations—but margins beginning to recover. We attribute the volume weakness to cyclical factors rather than any change in the long-term fundamentals of the business, and although we have slightly lowered our full-year earnings estimate, this has no impact on our BRL 18 fair value estimate or our wide moat rating. While the stock has rerated moderately during the last six months, we still think there is some upside from the market valuation as of early trading Aug. 3.