Brazil and Beauty - Two Growth Themes

 |  Includes: ABEV, ACV-OLD, SBH
by: Stephen Castellano

This week, 60 stocks make our "high-quality" list, up from 57 last week, with 10 additions and 7 deletions. 30 stocks make the "low-quality" list, down from 35 last week, with 0 additions and 5 deletions. One interesting large cap name appearing on our "high-quality" list is Companhia de Bebidas Das Americas (ABV); and one interesting small cap name is Sally Beauty Holdings Inc. (NYSE:SBH).

Companhia de Bebidas Das Americas (ABV), otherwise known as AmBev, is a $73.3b market cap brewing company based in Sao Paulo, Brazil. Even after its ~50% run-up over the past year, it pays a 2.10% dividend yield with a payout ratio of about 50%. The company appears very attractive in every key factor, except for relative valuation, which is only better than average.

The American Depository Receipts of AmBev have been on and off our list for the last several weeks due basically to fluctuating rankings in relative valuation. This means it is either entering growth territory or hitting the ceiling of an attractive relative valuation from a growth-at-reasonable-price (
(GARP)) perspective. We like the story and the growth metrics, so we think it is an attractive choice for at least a short-term placeholder in a high-turnover portfolio even if relative valuation may be pushing the envelope a bit.

AmBev has a 70% market share in Brazilian beer, led by such brands as Skol, Brahma, Antartica and others. It also sells carbonated soft drinks, bottled water and other non-carbonated beverages. Since 1999, the company has exclusive rights to produce, sell and distribute Pepsi
CSD and Gatorade products throughout Brazil. Anheuser-Busch InvBev (NYSE:BUD) has been the majority shareholder of AmBev since 2004, when it acquired 68% of the common shares and 34% of preferred shares, with 16% retained by a Brazilian charitable foundation known as FAHZ and the rest by public shareholders.

At a Morgan Stanley conference on November 19, AmBev made the case that Brazil is an attractive market for its beverages due to growing per capita growth, which in turn is driving interest in premium beverages. Beer per capital is increasing in Brazil, currently 60.9 liters per capita per year and up from 47.2 liters per capita in 2003. This compares to 80.7 liters in the USA, 85.8 liters in Venezuela and 156.5 liters in the Czech Republic. According to AmBev, between 2003 and 2008, 32 million people have moved up from the bottom to the middle class. Both the numbers and story are compelling.

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Sally Beauty Holdings (SBH) is a $2.5b market cap company headquartered in Denton, Texas, that distributes and retails professional beauty supplies. It is the largest distributor of professional beauty supplies in the U.S. based on store count and it has stores in every state except Hawaii. 82% of its $2.9b net sales for its fiscal year ended September 2010 were generated in the United States.

Sally Beauty Holdings was spun off from Alberto-Culver (NYSE:ACV-OLD) in 2006 in an initial public offering of stock. CEO Gary Winterhalter comes from Alberto-Culver, and the company's CFO Mark Flaherty was in various finance roles at Tandy Brands (OTCPK:TBAC) for ten years through 2007. The company operates through two business units, Sally Beauty Supply and Beauty Systems Group, or BSG. It provide customers with a wide variety of leading third-party branded and exclusive-label professional beauty supplies, including hair care and hair color products, styling appliances, skin and nail care products and other beauty items. Sally Beauty Supply stores target retail consumers and salon professionals, while BSG exclusively targets salons and salon professionals.

SBH gets the highest score for Analyst Revision Momentum, and very good scores in 3 out of 4 other key categories. The company carries a high amount of debt and has negative book value. But it has been paying back about ~$120m of debt each year for the last three years, which is improving its capital structure and lowering interest expense. At the same time, gross margin is expanding and EBITDA is growing. The company expects growth to be driven in part by a favorable aging baby boomer demographic, and through acquisitions in this fragmented industry. If the company can continue to pay down debt, grow margins, expand EBITDA and make attractive acquisitions, this company's stock could do extremely well relative to where it is today.

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Disclosure: None