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March 2, 2013

Stock of the Day

Recommendation: B-rated Buy

Welcome to the Stock of the Day for March 4, 2013. Shares of Brazilian brewer Ambev (ABV) have pulled back over the past few week. Is this a red flag or an opportunity to pick up a premium stock on the cheap? Find out in today's Stock of the Day.

Company Overview: Commonly known as AmBev, Companhia de Bebidas das Americas is the largest brewer in Latin America. Including Brazil, AmBev sells its products in 14 countries. While AmBev is best known for marketing beers like Antartica, Skol and Stella Artois, it is also the largest bottler of PepsiCo products outside the U.S. Recently, Ambev has announced plans to build a new $270 million beer brewing facility in southeastern Brazil. This is part of a larger plan to invest over $1.2 billion in Brazilian operations.

Earnings Rundown: Last Wednesday, Ambev posted solid operating results for the fourth quarter. The company did particularly well with its soft drink business in Brazil and it grew its market share in much of Latin America South. Meanwhile, beer volumes declined slightly in Canada due to the hockey lockout, but profits still grew slightly on fewer expenses. So compared with Q4 2011, earnings advanced 22% to R$3.73 billion (denominated in Brazilian Real), or R$1.19 per share. In U.S. dollars, adjusted earnings weighed in at $0.58 per share, which topped the $0.57 consensus estimate by 2%. Over the same period, net revenue climbed 21% to R$10.13 billion. Looking ahead to the rest of this year, AmBev forecasts high-single digit sales growth, in line with the Street view.

Dividend Buzz: Ambev also recently declared a quarterly dividend payment of $0.314 per share as well as a special dividend of $0.038 per share. ABV will go ex-dividend on Wednesday, so shareholders at tomorrow's close will receive both payments at the beginning of April. Currently, ABV yields 3.9%, significantly higher than other beverage players like Coca-Cola FEMSA (KOF), which yields 1.2%, and Dr Pepper Snapple Group (DPS), which yields 3.6%.

Current Ratings: Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. With the exception of the choppy month of August, Ambev has remained firmly in buy territory over the past 12 months. That's because institutional buying pressure has remained firm for ABV, so this stock receives a B-rating for its Quantitative Grade. Meanwhile, Ambev is also doing a good job keeping its financials in order: The company receives top marks for sales and earnings growth as well as return on equity. The company could stand to improve its operating margin growth and cash flow, though, so it receives a B-rating for its Fundamental Grade.

Bottom Line: As of this posting, March 4, 2013, I consider ABV a B-rated Buy. The recent consolidation was likely caused by normal profit taking and a stronger dollar, but I expect the stock to bounce right back, given its strong earnings prospects.

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