BUSINESS
Compania Cervecerias Unidas S.A. operates as a beverage company in Chile, Argentina, Bolivia, Colombia, Paraguay, and Uruguay. The company operates through three segments: Chile, International Business, and Wine. It produces and sells alcoholic and non-alcoholic beer under proprietary and licensed brands, as well as distributes Pernod Ricard products in non-supermarket retail stores. The company also produces and sells non-alcoholic beverages, including carbonated soft drinks, nectars and juices, sports and energy drinks, and ice tea; and mineral, purified, and flavored bottled water, as well as ready-to-mix products with instant powder drinks. In addition, it is involved in the production and distribution of pisco, cocktails, rum, flavored alcoholic beverages, gin, and cider.
INVESTMENT RATING
CCU is expected to continue to be a modest Value Builder reflecting capital returns that are forecasted to be above the cost of capital.
Compania Cervecerias Unidas has a current Value Trend Rating of F (Lowest Rating).
This rating combines inconsistent signals from two proprietary PTR measures of a stock’s attractiveness. Compania Cervecerias Unidas has a neutral Appreciation Score of 49 but a very low Power Rating of 10, and the Lowest Value Trend Rating results.
Compania Cervecerias Unidas’ stock is selling well below targeted value. The current stock price of $12.75 compares to targeted value 12 months forward of $16.
This neutral appreciation potential results in an appreciation score of 49 (51% of the universe has greater appreciation potential.)
Compania Cervecerias Unidas has a Power Rating of 10. (CCU’s very low Power Rating indicates that it only has a higher likelihood of achieving favorable investment performance over the near to intermediate term than 10% of companies in the universe.)
Factors contributing to this very low Power Rating include: the trend in CCU’s earnings estimates has been unfavorable in recent months; recent price action has been unfavorable; and the Malt Beverages comparison group is currently in an unfavorable position.
INVESTMENT PROFILE
CCU’s financial strength is low. Financial strength rating is 27.
Relative to the S&P 500 Composite, Compania Cervecerias Unidas SA has slightly more Value than Growth characteristics; its appeal is likely to be to investors heavily oriented toward Income; the perception is that CCU is higher risk. High expected growth is a positive for CCU. Relative weaknesses include: low forecasted profitability, low financial strength, and low historical growth. CCU’s valuation is low: high dividend yield, high P/E ratio, and low price/book ratio. CCU has unusually low market capitalization.
CURRENT SIGNALS
Compania Cervecerias Unidas’ current operations are eroding. Return on equity is falling, reflecting: falling asset utilization; declining pretax margin; and falling leverage.
Compania Cervecerias Unidas’ current technical position is very weak. The stock price is in a 3.0 month down move. The stock has declined 26.1% from its prior high. The stock price is below its 200 day moving average which is in a downtrend.
ALERTS
Compania Cervecerias Unidas SA (NYSE: CCU). Significant negative changes in investment behavior have recently occurred: negative upside/downside volume developed.
Compania Cervecerias Unidas SA (NYSE: CCU). Minimal positive changes in fundamentals have recently occurred: significant quarterly earnings acceleration occurred.
The stock is currently rated F.
Compania Cervecerias Unidas SA (NYSE: CCU) stock enjoyed a large increase of 4.3% on 4/11/24. The stock closed at $12.75. Moreover, trading volume in this advance was above average at 139% of normal. The stock has been weak relative to the market over the last nine months but has risen 5.0% during the last week.
CASH FLOW
In 2022, Compania Cervecerias Unidas SA generated a very significant increase in cash of +$388.7 million (+118%). Sources of cash were much larger than uses. Cash generated from 2022 EBITDA totaled +$421.3 million. Non-operating uses consumed -$42.7 million (-10% of EBITDA). Cash taxes consumed -$6.3 million (-1% of EBITDA). Re-investment in the business amounted to -$709.7 million (-168% of EBITDA). On a net basis, debt investors provided +$852.0 million (+202% of EBITDA) while equity investors withdrew -$126.0 million (-30% of EBITDA).
CCU’s Non-operating Income, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Compania Cervecerias Unidas Sa Peer Group as well. In most years, Compania Cervecerias Unidas SA was in the third quartile and top quartile. Currently, Compania Cervecerias Unidas SA is at the lower quartile at -10% of EBITDA (-$42.7 million).
CCU’s Cash Taxes, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Compania Cervecerias Unidas Sa Peer Group. In most years, Compania Cervecerias Unidas SA was in the top quartile and third quartile. Currently, Compania Cervecerias Unidas SA is upper quartile at -1% of EBITDA (-$6.3 million).
CCU’s Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Compania Cervecerias Unidas Sa Peer Group. (Since 2020 Business Re-investment, %EBITDA has accelerated very sharply.) In most years, Compania Cervecerias Unidas SA was in the second quartile and top quartile. Currently, Compania Cervecerias Unidas SA is lower quartile at -168% of EBITDA (-$709.7 million).
CCU’s Debt Investors, %EBITDA has experienced a very strong overall uptrend over the period. This improvement was accompanied by stability for the Compania Cervecerias Unidas Sa Peer Group. In most years, Compania Cervecerias Unidas SA was in the third quartile and top quartile. Currently, Compania Cervecerias Unidas SA is upper quartile at +202% of EBITDA (+$852.0 million).
CCU’s Equity Investors, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Compania Cervecerias Unidas Sa Peer Group. In most years, Compania Cervecerias Unidas SA was in the lower quartile and top quartile. Currently, Compania Cervecerias Unidas SA is below median at -30% of EBITDA (-$126.0 million).
CCU’s Change in Cash, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by stability for the Compania Cervecerias Unidas Sa Peer Group. In most years, Compania Cervecerias Unidas SA was in the top quartile and lower quartile. Currently, Compania Cervecerias Unidas SA is upper quartile at +92% of EBITDA (+$388.7 million).
CCU’s Cash, %Revenue has exhibited little to no overall change over the period. This stability was accompanied by stability for the Compania Cervecerias Unidas Sa Peer Group as well. In most years, Compania Cervecerias Unidas SA was in the top quartile. Currently, Compania Cervecerias Unidas SA is upper quartile at +22%.
PROFITABILITY
CCU’s return on equity has eroded modestly since 2013. The current level of 9.0% is 1.22X the low for the period and is -27.3% from the high.
CCU’s very strong negative trend in pretax operating return significantly offset by a very strong positive trend in non-operating factors is a major performance consideration.
The productivity of CCU’s assets rose over the full period 2013-2023: asset turnover has exhibited a volatile overall uptrend.
CCU’s pretax margin experienced a very strong overall downtrend over the period 2013-2023.
Non-operating factors (income taxes and financial leverage) had a very significant positive influence on return on equity.
CCU’s return on equity is substantially below median (9.0%) for the four quarters ended September, 2023.
Operating performance (pretax return on assets) is at the lower quartile (3.9%) reflecting asset turnover that is above median (0.84X) and pretax margin at the lower quartile (4.6%).
Tax “keep” rate (income tax management) is at the upper quartile (87.2%) resulting in after tax return on assets that is at the lower quartile.
Financial leverage (leverage) is upper quartile (2.68X).
GROWTH RATES
There are no significant differences between Compania Cervecerias Unidas’ longer term growth and growth in recent years.
Compania Cervecerias Unidas’ historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has fallen short of equity growth.
Annual revenue growth has been 4.2% per year.
Total asset growth has been 3.3% per year.
Annual E.P.S. growth has been -7.7% per year.
Equity growth has been -1.2% per year.
Compania Cervecerias Unidas’ consensus growth rate forecast (average of Wall Street analysts) is 20.7% — substantially above the average of the historical growth measures.
Relative to the Compania Cervecerias Unidas Sa Peer Group, Compania Cervecerias Unidas SA’s historical growth measures are generally third quartile. Revenue growth (4.2%) has been slightly below median. Total asset growth (3.3%) has been below median. Equity growth (-1.2%) has been substantially below median. E.P.S. growth (-7.7%) has been lower quartile.
In contrast, consensus growth forecast (20.7%) is upper quartile.
PRICE HISTORY
Over the full time period, Compania Cervecerias Unidas SA’s! stock price performance has been variable and significantly below market. Between June, 2013 and April, 2024, Compania Cervecerias Unidas SA’s! stock price fell -55%; relative to the market, this was a -86% loss. Significant price move during the period: 1) December, 2017 – October, 2020: -64%.
TOTAL INVESTMENT RETURNS
Current annual total return performance of -21.8% is lower quartile relative to the S&P 500 Composite.
In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through February, 2024 of -21.8% is lower quartile relative to Compania Cervecerias Unidas SA Peer Group.
Current 5-year total return performance of -11.4% is lower quartile relative to the S&P 500 Composite.
Through February, 2024, with lower quartile current 5-year total return of -11.4% relative to S&P 500 Composite, Compania Cervecerias Unidas SA’s total return performance is substantially below median relative to Compania Cervecerias Unidas SA Peer Group.
VALUATION BENCHMARKS
Relative to S&P 500 Composite, CCU’s overall valuation is quite low. The highest factor, the ratio of enterprise value/earnings before interest and taxes, is near the lower quartile. Price/earnings ratio is near the lower quartile. Ratio of enterprise value/assets is lower quartile. Price/equity ratio is lower quartile. The lowest factor, the ratio of enterprise value/revenue, is lower quartile.
Relative to Compania Cervecerias Unidas SA Peer Group, CCU’s overall valuation is low. The highest factor, the price/earnings ratio, is at median. Ratio of enterprise value/earnings before interest and taxes is below median. Price/equity ratio is below median. Ratio of enterprise value/assets is near the lower quartile. The lowest factor, the ratio of enterprise value/revenue, is near the lower quartile.
Compania Cervecerias Unidas SA has a major value gap compared to the median valuation. For CCU to rise to median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 1.14X to 1.86X. If CCU’s ratio of enterprise value/revenue were to rise to 1.86X, its stock price would be lower by $13 to $26.
For CCU to hit lower quartile valuation relative to the Compania Cervecerias Unidas SA Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 1.14X to 0.94X. If CCU’s ratio of enterprise value/revenue were to fall to 0.94X, its stock price would decline by $-4 from the current level of $13.
VALUE TARGETS
CCU is expected to continue to be a modest Value Builder reflecting capital returns that are forecasted to be above the cost of capital.
Compania Cervecerias Unidas SA’s current Price Target of $16 represents a +25% change from the current price of $12.75.
This neutral appreciation potential results in an appreciation score of 49 (51% of the universe has greater appreciation potential.)
With this neutral Appreciation Score of 49, the low Power Rating of 10 results in an Value Trend Rating of F.
Compania Cervecerias Unidas SA’s current Price Target is $16 (-18% from the 2022 Target of $19 but +25% from the 04/11/24 price of $12.75). This slight fall in the Target is the result of a +5% increase in the equity base and a -22% decrease in the price/equity multiple. The forecasted decline in cost of equity has a very large positive impact on the price/equity multiple and the forecasted increase in growth has a slight positive impact as well. More than offsetting these Drivers, the forecasted decline in return on equity has a very large negative impact.
PTR’s return on equity forecast is 4.8% — slightly below our recent forecasts. Forecasted return on equity suffered a dramatic, erratic decline between 2014 and 2022. The current forecast is well below the 2021 peak of 14%.
PTR’s growth forecast is 9.0% — above our recent forecasts. Forecasted growth enjoyed a dramatic, erratic increase between 2018 and 2022. The current forecast is well above the 2021 low of 0%.
PTR’s cost of equity forecast is 3.8% — in line with recent levels. Forecasted cost of equity exhibited a modest, erratic increase between 2014 and 2022. The current forecast is below the 2021 peak of 7.8%.
At Compania Cervecerias Unidas SA’s! current price of $12.75, investors are placing a positive value of $1 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 7.0% per year, and a return on equity of 8.8% versus a cost of equity of 5.7%.
PTR’s 2024 Price Target of $16 is based on these forecasts and reflects an estimated value of existing assets of $15 and a value of future investments of $1.
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