LauriPatterson
Beverage company Compañía Cervecerías Unidas S.A. (NYSE:CCU) has had an interesting performance in its share price since early August 2021, when it traded at approximately $21.80 per share, and from there began a prolonged descent to a 52-week low of $9.31 on September 26, 2020.
What’s interesting is the company was getting punished because of political concerns, and after plummeting to $9.31, has rebounded nicely even after a very weak third-quarter earnings report, primarily from very weak results from the Chile market.
It appears what has happened with the stock is a lot of the political concerns and performance expectations were already priced in, so when it reached what seems to be a bottom at a little over $9.00 per share, the market apparently shrugged off the weak numbers and started bidding up its shares.
In this article, we’ll look at some of the recent earnings numbers and primarily on the results in Chile and what the company is doing to improve them over the long term.
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Some of the numbers
As we look at the numbers, take into consideration they’re in Chilean Pesos (CLP), not U.S. dollars.
Revenue in the third quarter was CLP$684 million, up 9 percent from the CLP$623 million in the third quarter of 2021. Gross profit as a percent of sales was CLP$292 million, slightly down from gross profit as a percent of sales of CLP$293 million year-over-year.
Net revenue in the quarter was CLP$17.2 million, down 59.1 percent from the same reporting period in 2021.
EBIT was CLP$33.5 million in the quarter, with an EBIT margin of 4.9 percent, compared to EBIT of CLP$71 million in the third quarter of 2021, with EBIT margin of 11.5 percent, down 53.1 percent year-over-year, or 657 bps.
EBITDA in the reporting period was CLP$67.6 million, with EBITDA margin of 9.9 percent, compared to EBITDA of CLP$101.4 million in the third quarter of 2021, and EBITDA margin of 16.3 percent, down 33.4 percent year-over-year, or 641 bps.
The main catalysts driving down margin were depreciation of CLP$ against the U.S. dollar, increase in various material costs, and rising inflation in the geographic markets CCU competes in.
While the company took a big hit in the quarter, led by weakness in the Chile market, overall volumes were down only 2.8 percent in the third quarter, but up 16.4 percent when measured against pre-COVID 2019. Also, in its main brand categories, market share remained stable.
Cash and cash equivalents at the end of the third quarter was CLP$636 million, up from the CLP$266 million at the end of calendar 2021. Total debt at the end of the quarter was CLP$1.37 billion.
The impact of Chile
CCU is based in Chile, so sales outside the domestic market are heavily influenced by the exchange rate between the U.S. dollar and the Chilean peso.
During the third quarter, there was a 20 percent devaluation of the Chilean peso against the U.S. dollar, resulting in margin and gross profit pressure on its performance.
Also contributing to the weak performance in Chile was rising raw material and packaging costs, along with energy inflation.
A concerning drop in consumption also weighed on the Chilean market, with volumes dropping by 4.5 percent in the third quarter. That was partly attributed to “negative mix in the portfolio,” which is apparently why management mentioned refocusing on its core brands in the current economic environment, which should have more pricing power to offset rising costs.
In comparison to volume in its other markets, international was down 1.3 percent, and wine down 0.6 percent.
And concerning EBITDA, in Chile, it plunged by 51.1 percent in the third quarter.
How CCU performs in the quarters ahead will be directly determined by how it executes its strategy in Chile.
Conclusion
Based upon the company’s third-quarter performance, it’s been surprising how resilient Compania Cervecerias Unidas’ share price has been, especially after being under pressure when its performance was better.
But as mentioned earlier, it seems a lot of this was already priced in when CCU stock hit its 52-week low near the end of September 2022. With the stock hitting what appears to be its bottom, it seems it had nowhere to go but up afterwards, based upon the company’s fundamentals remaining strong, and the assumption the U.S. dollar will eventually start to reverse direction as the Federal Reserve starts to slow down interest rate increases and inflation comes down.
Under that scenario, the performance in Chile will improve, which will have a significant effect on the performance of CCU in the quarters ahead. It’s not a matter of if, but when it happens.
Even so, after the $3.00+ jump in its share price since the end of September, I think the share price of Compania Cervecerias Unidas is getting a little ahead of itself, especially when it’ll take some time to dig out of the hole it’s now in.
Investors apparently liked the six-point plan by management to improve its results, especially in Chile. They include working on maintaining scale while the company manages revenue (two of the six); increasing efficiencies and lowering costs; cutting back on CapEx while improving its use of working capital; increasingly focusing on its core brands and high-volume innovations that widen margins; and continuing to invest in strengthening its brand.
Based upon that response to the weak quarter, especially in Chile, it points to the problem being bigger than weak economic conditions, as the company works on increasing volumes and sales in its important domestic market.
As the economic conditions improve, which isn’t likely to happen earlier than the second half of 2023, improved efficiencies, cutting costs, and marketing its core brands while boosting overall brand recognition, should result in the company performing well over the long term.
In the short term, I’m more leery about Compania Cervecerias Unidas because of the big jump in its share price even after the weak earnings report. How long that can last before a correction in the stock should concern those looking to take a position in the company for the first time.
There are no significant catalysts I can see that will push the CCU share price sustainably higher in the near term, so it seems like there will be a downward move. This will probably result in tighter, more level price movement until the results of initiatives implemented by Compania Cervecerias Unidas management are shown to bear fruit.
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