Compania Cervecerias Unidas: It’ll Take Time To Dig Out Of Its Hole (NYSE:CCU)

Compania Cervecerias Unidas S.A. (NYSE:CCU) is coming off a tough year, with most of its performance dropping significantly year-over-year. As I mentioned in my last article about CCU, I believe the company needs to have a stronger correction in light of its growth and profitability challenges, in order to provide a better entry point and reward for investors considering taking a position at this time.

Upon the release of my last article on CCU on December 1, 2022, it traded at a high of approximately $12.50, and did pull back to about $11.60 on January 1, 2023, before starting a nice run to its 52-week high of $16.60 on March 6, 2023, and is trading at $15.00 per share as I write.

While it’s understandable why the stock jumped from its 52-week low of $9.31 on September 26, 2022, the boost in its share price since December 1, 2022, isn’t as understandable, as evidenced by the ongoing drop in revenue and earnings of the company.

I believe the reason for that is the market is looking further out for the beverage company and considers the long-term growth narrative to still be intact.

If that’s correct, it still doesn’t take away the fact that the company is underperforming for now, and it’ll take some time to work itself out of weak market it’s now operating in.

In this article we’ll look at its recent numbers, growth and profitability performance, and why I think it’s still best for investors considering initiating a position in CCU to wait for a better entry point.

Some of the numbers

Revenue in the fourth quarter of 2022 was CLP$768.4 million, compared to revenue of CLP$822.4 million in the fourth quarter of 2021, a decline of 6.6 percent.

Gross profit in the reporting period was CLP$355.1 million, compared to a gross profit of CLP$390.8 million in the fourth quarter of 2021, down 9.1 percent.

EBITDA in the fourth quarter of 2022 was CLP$122.7 million, compared to EBITDA of CLP$155.4 in the fourth quarter of 2021.

Net income in the fourth quarter of 2022 was CLP$46.9 million, or CLP$126.8 per share, compared to net income of CLP$73.6 million, or CLP$199.3 per share. Both net income and EPS were down 36.4 percent year-over-year.

As for EBITDA margin, that plunged from 17.9 percent in the fourth quarter of 2021 to 13.2 percent in the fourth quarter of 2022. The major catalysts for the decline in EBITDA margin were unfavorable FX, higher input costs in energy, packaging, and raw materials.

Breaking it down by segments

Chile

In its Chile market the revenue was up 3.6 percent, with the driver there an average pricing increase of 12.4 percent. That was partially offset by a 7.8 percent decline in volumes.

A big question to me will be how much more pricing power CCU has to offset declining volume. It of course will also have an impact on EBITDA and EBITDA margin, which were both significantly down in the reporting period.

EBITDA in the Chilean market dropped to CLP$71.9 million, down 24.4 percent year-over-year, while EBITDA margin fell from 19.4 percent to 14.2 percent.

International Business Operating

The International Business Operating unit of the company includes Argentina, Bolivia, Paraguay and Uruguay. Net sales in those markets were down 27.6 percent in the fourth quarter of 2022, primarily from a drop in average price by 26.7 percent.

Volume in the reporting period was down 1.1 percent, giving a possible glimpse into what could happen if pricing power in Chile doesn’t hold.

As for EBITDA, that was CLP$47.8 million, down 19.7 percent year-over-year. That was mostly attributed to the exchange rate in Argentina associated with hyperinflation accounting, according to management.

Wine

Its smaller Wine Operating segment had revenue grow by 3.2 percent in the fourth quarter of 2022, with a 5.7 percent boost in prices the catalyst there. That was partially offset by a 2.4 percent decline in volumes.

EBITDA in the reporting period was CLP$13.4 million, up 18.5 percent year-over-year.

Joint Ventures

In its JV segment, its business in Columbia enjoyed some success with its partner Postobón, with revenue jumping almost 20 percent in the quarter, with higher pricing and volumes driving the performance. In regard to its JV with Danone in Argentina, where it sells water, higher pricing and volumes also let to improvement in that market. The challenge going forward for CCU is to find ways to improve costs while growing revenue. In that regard, management did say prices of some inputs have been falling, such as aluminum and barley. If that reflects some deflationary movement in commodities, it could be a good step toward improving the top and bottom lines of the company going forward. That would have a significant impact because cost of sales in the quarter were up 17.3 percent.

The other factor will be how the company is able to execute on its “HerCCUles 2023” initiative.

HerCCUles 2023

In order to attempt to return to profitability, CCU is implementing a plan with 6 areas it is focusing on. They include, maintaining the business scale of the company; strengthening its revenue management effort; deliver improvement in costs and expenses; optimize CapEx and working capital; continue to focus on its core brands and innovations that produce higher volume; and continue to invest in branding the company.

None of the above are anything unique. What’s important to watch is whether or not the actions taken by management are producing results.

One of the problems the company has is the limitations it has on the moves it makes when many contributing factors are outside of its control. The two most important ones in my opinion will continue to be cutting costs and how much pricing power the company retains throughout 2023 and early 2024. That, to me, will determine whether or not it can regain momentum in revenue and earnings.

Conclusion

I think CCU has a solid future ahead of it, and patient investors should reap the benefit of holding on during the volatile economic times the company is facing. The last time I wrote about CCU I said it needed to correct to give investors a better entry point, and it did, dropping by close to a dollar before climbing by almost $5.00 per share before pulling back.

Even so, it wasn’t the level of correction I thought the company needed to have in order to offer healthy risk/reward to the investors. Nonetheless, it got a nice bounce, and those that got in enjoyed some good returns in a relatively short period of time.

I maintain my thesis for the company this time around, also believing it must further correct to provide potential investors with an attractive entry point and opportunity to make further gains.

For those in it for the long term, I think the company is going to produce some decent numbers in the years ahead once the global economy improves and consumers start spending more on beverages in the markets CCU competes in.

I still maintain that the stock is less attractive at current price levels, and needs to fall further before offering enough upside to make it worth taking a position in. If it gets that correction, that would be a good time to either initiate a new position or add to a position, as over time, I think the company return to boosting revenue and improving the bottom line, which if it is perceived to be sustainable, should be the catalysts that push it to much higher levels.