The One Brazil Stock Everyone Should Own

Investing would be so much easier with a time machine. A person could simply go back in time and buy today’s industry behemoths while they were still just up and coming regular companies.

Too bad there’s no such thing as a time machine.

However, in today’s fast-changing world, investors might not need one. Certain companies and countries are in a similar stage of development that the United States was many years ago. Companies are emerging as dominant players in proven lucrative industries in large and fast-growing economies throughout the world.

One of the world’s fastest growing economies is Brazil. The country has the world’s fifth-largest population, and strong economic growth during the past several years has set the country on a trajectory of rapidly increasing wealth. The country’s middle class and disposable income is rising at a break-neck pace.

According to Brazil’s census bureau, the middle class population soared by 20 million people, or +24%, since 2005, and now represents 46% of the population (as of 2009), compared to 34% in 2005. The middle class in Brazil is now almost 90 million strong, and these higher incomes mean rising consumption.

While the country does have strong exports, domestic consumption accounted for 60% of GDP in the fourth quarter of 2009. The Chief Economist at Brazil Bank, Illan Goldfajn, recently categorized the Brazilian population as one that loves to spend. As an example of the country’s propensity for spending, high-end jeweler Tiffany & Co (NYSE: TIF) has more stores in Sao Paulo (Brazil’s largest and wealthiest city) than any other city in the world.

While most of Brazil’s middle class can’t afford high-end jewelry, they can afford something else — beer.

Companhia de Bebidas Das Americas, or AmBev (NYSE: ABV), is a Brazilian company that sells beer, soft drinks and non-carbonated beverages in 14 countries throughout the Americas. AmBev is the largest retail company in Brazil and the largest beer company in Latin America. In fact, AmBev the world’s fifth largest brewer and the third largest Pepsi (NYSE: PEP) bottler.

How dominant is this company in Brazil?

AmBev has an astounding 69% share of the country’s beer market. And that market is large and growing. Brazil is already the third-largest beer consuming nation (next to the United States and China). But consumption is increasing at one of the fastest rates in the world (a +5.5% five-year compound annual volume growth). In addition to rising income, the country has a strong demographic for beer consumption, as the median age of the population is just 28.3 years.

Selling beer and soft drinks to an ever-rising and thirsty Brazilian consumer class has been a good business. Even the worldwide financial crisis and recession didn’t interrupt the company’s sales growth. Revenue continued to rise +18% between 2007 and 2009, to BRL (Brazilian Real) 23.2 billion ($13.3 billion), and the bottom line, net income, rose +20% over the same tumultuous period.

The earnings pace has picked up recently. In the first half of 2010, organic revenue (without currency effects) soared +11.5% compared with last year’s first half, and sales volume grew +8.3% during the same period. AmBev is also one of the most profitable companies in the beverage industry, with a net profit margin of 25.7%, compared with the industry average of 5.9%.

That said, AmBev’s stock price is up more than +40% since early July and near its 52-week high. However, there are still good reasons to believe the stock will continue to perform well from here even in the short-term.

For one, while the stock sells for a relatively high 23.8 times trailing earnings, compared to the S&P 500’s average of 14.7, it is still selling slightly below its five year average price-to-earnings ratio (P/E). And the company has returned investors an amazing +35% a year during those five years, compared to just +2.2% for the S&P 500. In addition, the company pays several dividends a year, which have totaled $4.25 per ADR in the past twelve months. This translates to about a 3.0% yield at current prices. That payout should increase as AmBev’s sales increase over time.

Also, the Brazilian economy is absolutely booming. GDP grew at a Chinese-like +8.9% clip in the first half of 2010, compared with less than +3.0% in the U.S. Stronger growth in Brazil should also lead to a stronger real versus the dollar, resulting in higher prices and dividends for American ADR holders. The real has already appreciated +35% against the dollar since March of 2009. Zacks consensus estimates are for AmBev to earn $6.61 per ADR this year (a +27% increase from 2009) and $7.46 per ADR in 2011.

Action to Take –> Aside from all the numbers, there is just plain common sense as to why this is a great stock to own. Do you think that a young population with rising disposable income that has shown a propensity to spend is likely to drink more beer or less beer in the years ahead?

AmBev already generated $13.3 billion in revenue in 2009. But every signal indicates that the company is nowhere near finished growing. This highly profitable company should continue to emerge into one of the world’s blue chip companies in the years ahead.

Despite the recent run up in price, AmBev’s shares still sell near their average historical valuation. Exposure to the Brazilian economy and diversification away from the dollar make this a particularly timely investment that can be purchased at current levels.

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