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  • Raise in drink taxes in Brazil may open good buying opportunity for Ambev 0 comments
    Mar 23, 2011 8:32 PM | about stocks: ABEV
    After conversations with members of the beverage industry in Brazil, the Brazilian government confirmed it will implement an increase in taxation for the industry.
     
    Market analysts estimate that the increase should be about 15%, considering the increase in IPI and PIS/ Cofins, which constitute about 11% of the final consumer price.
     
    Passing the cost to the consumer
     
    However, companies must pass the cost to the consumers. The transfer should represent an increase of 2% to 3% in the consumer price.
    The increase, however, will once again only show the strength of Ambev's brands: mainly Skol, Brahma and Antarctica. Consumers of these brands are not likely to reduce or switch consumption because of a 3% increase. Moreover, the premium brands: Bohemia and Antarctica Original are even less likely to be affected.
     
    Investments in 2011
     
    As for investments this year, there is a clear downside risk for the intentions of AmBev to invest up to R$ 2.5 billion, and the figure could be reduced to R$ 2 billion, but not less than that, considering demand in 2012 will increase due to projected 7.5% increase in real wages.
     
    Buying opportunity
     
    Ambev stocks are trading at around 18 times P/E at $ 27.50, which is not a bargain but is not too bad considering the growth opportunities to which Ambev is exposed. However, when these taxes take effect later this year, the stock may go down and open a good buying opportunity. I understand that if the ADRs go down to 23 - 24 dollars, it becomes a very interesting stock. Another option for a trade at this point is to sell the put for October, 2011 with strike price of $ 24.00. That is yelding approximately $ 1.3.


    Disclosure: I am long ABV.

    Additional disclosure: I am not long ABV directly but I have bullish option positions.
    Stocks: ABEV
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