Is Ambev the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Ambev (NYSE: ABV  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Ambev.

Factor What We Want to See Actual Pass or Fail?
Growth 5-Year Annual Revenue Growth > 15% 9.6% Fail
  1-Year Revenue Growth > 12% 8.8% Fail
Margins Gross Margin > 35% 66.5% Pass
  Net Margin > 15% 30% Pass
Balance Sheet Debt to Equity < 50% 27.6% Pass
  Current Ratio > 1.3 1.22 Fail
Opportunities Return on Equity > 15% 32.5% Pass
Valuation Normalized P/E < 20 20.92 Fail
Dividends Current Yield > 2% 3.9% Pass
  5-Year Dividend Growth > 10% 46.3% Pass
       
  Total Score   6 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

Ambev pours up an attractive score of 6. As part of an even larger network, the Brazilian beverage maker focuses on one of the fastest-growing regions in the world.

Ambev is a subsidiary of the larger Anheuser-Busch InBev (NYSE: BUD  ) , which itself has had a long and storied history of mergers and acquisitions. Ambev produces a wide range of beers and soft drinks throughout Central and South America, as well as distributing PepsiCo (NYSE: PEP  ) products in Brazil and elsewhere in Latin America.

Thanks to its presence in a growth market, Ambev hasn't seen the same top-line pressure that the recession caused for some of its brewing competitors, such as Molson Coors (NYSE: TAP  ) . Ambev's growth has not only defied Molson's contraction over the past five years to remain positive but also outpaces the growth of Mexican rival FEMSA (NYSE: FMX  ) . And although its Anheuser-Busch InBev parent is saddled with debt, Ambev has a relatively clean balance sheet.

As long as Brazilian growth continues to help the entire continent expand faster than the U.S. and other developed nations, Ambev should continue to grow. Its shares are somewhat pricey right now, but with a good dividend, Ambev might get even closer to perfection in the years ahead.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click here to add Ambev to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Molson Coors is a Motley Fool Inside Value recommendation. FEMSA is a Motley Fool Global Gains pick. Motley Fool Options has recommended a diagonal call position on PepsiCo, which is a Motley Fool Income Investor recommendation. The Fool owns shares of Molson Coors and PepsiCo. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 19, 2011, at 9:43 AM, sentinelbrit wrote:

    Brazil has the world cup in 2014 and the Olympics in 2016...beverage consumption will ramp up considerably.

  • Report this Comment On April 19, 2011, at 8:07 PM, Matt84 wrote:

    For 5 year sales growth, I use a metric of 5%, ROE of 15%, D/E under one, current ratio at least one, P/E under 20, yield over 2%. They also have FCF of 3.61B. ABV meets all of my criteria, yet when I use a DCF calculator, I get a price of $19.04 with an EPS 5 yr growth rate of 5%. Analysts think it will grow EPS the next five years at 7.9%, making that a price of $21.39. Solid company, but my limited experience tells me they're overvalued, for my tastes anyway. A growth investor might want to look into them for a buying opportunity. I'd consider buying in (with metrics similar) under $18.

  • Report this Comment On July 03, 2011, at 4:19 PM, crsecon wrote:

    Anybody know the difference between ABV and ABV-C (ABV.C) Stocks? Cannot find a straight answer in usually authoritative places.

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