This third part of my investing in Brazil series (see part I here and part II here) focuses on consumer goods companies in the region. Brazil is one of the world's fastest growing consumer goods markets in the world with a population on nearly 190 million people. Not many of these companies are available easily to American investors, but these are two best ADRs for those who want to gain from growth the everyday consumer in Brazil over-investing in heavy industry.
Ambev is Anhauser-Busch InBev's Brazilian subsidiary. It controls 70% of Brazil's beer market with leading brands such as Budweiser (launch will occur in the 3rd quarter of 2011), Stella Artois, and Skol along with popular local beers Antarctica and Brahma. It is also Pepsi's largest bottler outside the US, and distributes Pepsi brand drinks and Gatorade to Latin America. Ambev's growth can be found in the shift that consumers have made to more premium brands of beer with the rising income in the country.
Financially, Ambev is in solid shape with a return of investment of 25%, a 30% profit margin, a P/E ratio of 17, and a PEG of 1.74. The company has a low amount of debt for a capital intensive bottling company with a debt/equity ratio of 0.17. With Ambev's maturity, the company pays a solid dividend of 2.53%; however, growth will slow down from 24% annually to approximately 10% over the next five years. If you want a lower risk way to invest in Brazil, this is a good one, as people will always be thirsty. However, it may not have the dynamic growth of other emerging market stocks. To get the best value, buy when the stock falls below $26 per share.
Brazilian Fast Food Corporation (OTCPK:BOBS)
Although not available on the NYSE, the Brazilian Fast Food Corporation is a small cap opportunity to capitalize on Brazilian consumers eating out more. The company runs Brazilian franchises of the American brands KFC and Pizza Hut along with locally popular knockoffs of Sbarro and Burger King called Boca al Lupo and Bob's, respectively.
Fundamentally, the financials and growth prospects are sound. It has an expected growth rate of 17% versus the industry average of 10.4%. It has an ROI of 16.94% versus a 5% industry average which highlights effective management. Its P/E matches the industry level of 12; it declared a dividend in July 2010 and has risen to a 3% annualized payout yield since then.
Overall, the current price level reflects the company's value. I think the stock could be a good buy in the long run, but it needs to fall to $8 support level first before it becomes a discount. Since it is over the counter, watch out for high bid ask spreads when trading.
With the current pullback in emerging markets, I do not recommend just jumping into Ambev or the Brazilian Fast Food Corporation immediately. Technical analysis indicators are in downtrends and overbought territories, so you should wait to buy these stocks until they reach the prices I recommended above.
However, in the long run, these stocks are best of breed companies leading Brazil's fast food and beverage industries. Their valuations are still reasonable and the stocks should expect to rise with the growth of the Latin American economy.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.