Latin America has struggled economically in the past couple of years, as the commodities-driven growth throughout much of the region has given way to weak conditions in key markets such as energy and metals. That has had implications for the consumer economy as well, and beverage maker Compania Cervecerias Unidas (NYSE:CCU), also known as United Breweries, has had to deal with the headwinds from a strong dollar and competition from rivals such as Ambev (NYSE:ABEV). Coming into its third-quarter financial report, United Breweries investors had finally started to hope that the company could post some encouraging results, and the beverage specialist did indeed show it could stand up to difficult conditions to produce growth. Let's look more closely at how Compania Cervecerias Unidas performed during the quarter and whether the stock can keep climbing.
Investors drink to United Breweries
United Breweries' third-quarter results showed solid gains. Revenue jumped 16% to $521.1 million, which was about 1% higher than the consensus forecast among those following the stock. Net income jumped at an even faster 38% pace to $37.4 million, and that produced earnings of $0.17 per American depository receipt, which was a penny less than investors had wanted to see.
What's important to keep in mind, though, is that United Breweries used average exchange rates throughout the period in reporting its dollar-denominated results, effectively removing the impact of the decline in the Chilean peso's value during the period. Whereas $1 fetched less than 600 pesos this time last year, it is worth nearly 700 pesos this quarter, making the actual dollar-denominated growth far lower than simply using an average of 640 pesos per $1 as the company's financial statements do.
Regardless, a closer look at United Breweries' results shows some encouraging signs. The key Chile operating segment saw sales gains of just 55, but the Rio de la Plata segment saw revenue climb by more than half, and the company's wine business posted a solid 11.5% rise in sales. Overall, the company was able to impose higher pricing while still boosting volumes.
In Chile, United Breweries pointed to brand-building efforts and marketing as beating back the slowdown in the Chilean economy. The company also gained market share in Argentina, Paraguay, and Uruguay, leading to greater confidence in what to the company is its international segment, but the wine business remains extremely competitive.
What's ahead for the beverage giant?
CEO Patricio Jottar was pleased with United Breweries performance. "We have managed to grow volumes, market share, and margins despite a slow economic environment," Jottar said, "building on our solid brands and the continuous search for efficiencies through our commitment to the "ExCCelencia CCU" program." Jottar believes it can keep boosting its financial performance over time as a result of those efforts.
In addition, United Breweries does get some positive benefit from the strong U.S. dollar. Because its wine business exports Chilean-produced bottles around the world, the foreign currency it brings in translates into more Chilean pesos, helping its overall results.
Yet United Breweries can expect further competition. Ambev has traditionally relied on its Latin America South division, which includes markets that United Breweries has a huge presence in, for a substantial part of its overall profits. From 2012 to 2014, the Latin America South unit has given Ambev its second-highest sales and pre-tax income, trailing only Ambev's home Brazilian market. If Latin American economies start to recover faster, then United Breweries will have to answer the call and stand up to more intense competition.
For now, though, investors in Compania Cervecerias Unidas were pleased with the beverage company's overall performance, sending shares higher after the announcement. It'll be important for the company to make the most of improving conditions while they last to cement its position amid the key providers of beer and soft drinks to a large swath of South America.