Quench Your Portfolio's Thirst With Undervalued AmBev

| About: Ambev - (ABEV)
This article is now exclusive for PRO subscribers.

Not only was the 2012 Super Bowl one of the more exciting and most watched games in super bowl history, it also helped to kick start many beer brewers' sales for the year. In the past, Super Bowl beer consumption has on average accounted for 3% of all beer consumed annually, as reported by the Beer Institute, the industry's lobbying arm. With a record-setting audience and intense match up, it would come as no surprise that this year's Super Bowl was one straight from the dreams of the alcoholic beverage industry.

That being said, it is surprising that one of the largest brewers in the industry, AmBev (ABV), happens to be trading below "fair value." AmBev's brands include some of the most popular in the states and internationally including: Bass, Beck's, Budweiser, Michelob, Spaten, St. Pauli Girl, and Stella Artois. While there has been a shift in consumer preferences with beer drinkers increasingly preferring specialty craft and local beers, the beer industry has made it seem almost inhumane to not have a case Bud Light or a 6-pack of Coors in the fridge.

2011 was a decent year for the company, not stellar by any stretch of the imagination, but the company managed to increase revenue 8.8% year over year and net operating profit grew to $7.939B. Moving forward the company is expected to grow earnings at a approximately 10% annually over the next five years, according to consensus analyst estimates. To get a better idea of whether or not the company is truly "under valued" I have decided to put the stock through a "stringent DCF analysis." In this analysis I've cut the company's revenue growth to a meager 4% annually and raised the cost of goods sold to 36%. To give you an idea of the stinginess behind these numbers, in 2009 the company exhibited revenue growth of 5.8% and COGS of 34.8%. The results of this model, keeping all other variables constant with analyst estimates, yields a Discounted Cash Flow valuation of approximately $46/share, a 22% premium to the current price.

To complement the current low valuation of the stock is the fact that the company has shown a responsibility to its shareholders by making dividend payments, albeit on an irregular basis and varying size. The below fair value valuation coupled with the company's commitment to returning profits to shareholders in the form of dividends makes AmBev a solid investment for many investor portfolios. While often times I would make a secondary recommendation for those investors who prefer to hedge their positions, AmBev options are rather illiquid and do not provide the risk/return I typically look for when hedging.

Disclosure: I am considering going long ABV in a retirement account. I may employ an alternative strategy of selling secured puts as an alternative to buying the stock outright.