May 1, 2014, 8:11 A.M
Yesterday, news came out that, to close fiscal gap, Brazil will increase taxes on cold beverages such as beer and soda starting June 1. Shares of AmBev (ABV) slumped 5.1% closing at $7.25.
The price reaction seems unnecessary, noted J.P. Morgan. The bank estimates that AmBev will need to raise its beer prices by about 5% to offset the increases in taxes, which translates to around 3% decrease in sales volume. As a result, AmBev’s 2014 and 2015 earnings per share will fall by 2% and 3% respectively, lower than the 5.1% price drop yesterday.
In addition, AmBev is good at optimizing price increases. Here are analysts Andrea Teixeira, Pedro Leduc, Joseph Giordano and Gabriel F de La Rocha:
Intelligent price increases is a skill for which we give management the benefit of the doubt. This potential decline may also be mitigated by AmBev’s branding power, SKU flexibility and additional consumption occasions (sport events).
J.P. Morgan has a Buy rating on AmBev, with $7.9 price target.
Investors may have been spooked that the beverage tax came earlier than the expected October time frame. In addition, this is the second beverage tax hike this year, as the Brazilian government attempts to manage a deteriorating fiscal account ahead of the October elections.