Tough Economic Conditions Can't Hold United Breweries Back

Markets Motley Fool

Compania Cervecerias Unidas (NYSE: CCU) is a diversified beverage company that does business throughout much of South America. Headquartered in Chile, the company known in English as United Breweries has much of its fortunes tied to the local economies. When times are tough, United Breweries has to work harder in order to make progress with its growth, and lately, finding a path to prosperity has become more of a struggle for the beverage maker.

Continue Reading Below

Coming into its second-quarter financial report, United Breweries investors wanted the company to rebound from sluggishness earlier in the year. The beverage maker saw good gains that pointed toward a recovery even though company executives cited difficult conditions in some of its key markets. Let's take a closer look at United Breweries and what drove its performance during the quarter.

United Breweries gets some fizz in its numbers

United Breweries' second-quarter results included solid performance. Net sales were up 12% in local-currency terms, which was slightly greater than most investors had expected. Net income jumped by more than a third from year-ago levels, and that produced earnings of $0.07 per share, which was exactly what those following the stock had for their consensus forecast.

Looking more closely at the numbers, United Breweries bounced back well in key fundamental respects. Volumes rose 7% to 5.12 million hectoliters, which accelerated from the weak growth in the first quarter. Average prices rose nearly 5% to help support overall revenue growth as well.

United Breweries saw different performance among its segments. As we've seen before, the Chilean business was weak, with volume gains of just 3% and net sales climbing at a 7% pace. The company said it had to overcome a weak economic environment in Chile that included pessimistic consumer confidence levels, but efforts to maintain overall market share were successful.

Continue Reading Below

Internationally, United Breweries looked a lot stronger. Segment sales soared by more than two-fifths on a 27% jump in volume and 13% higher prices. Favorable weather helped the company, as did gains in market share in Argentina and particularly strong volume growth in Paraguay and Uruguay. Keeping up with inflation in certain markets has been a challenge, but United Breweries has been able to do so in part by seeking out internal efficiency and taking advantage of economies of scale.

The wine segment once again underperformed the rest of the company. Volumes fell 3%, leading to a 1% drop in net sales, and pre-tax profit fell roughly 25% to 30% from year-ago levels. Higher costs and poor harvests have resulted in lower export volumes, and United Breweries hasn't been able to make up the difference through price increases.

Can United Breweries keep things moving forward?

CEO Patricio Jottar was pleased about how things have gone. "We have been able to continue the positive trend," Jottar said, "and we maintain an optimistic view regarding the medium and long-term perspective of our economies. However, we remain cautious regarding short-term macroeconomic challenges, including consumer confidence." By being smart about revenue management and internal cost-cutting initiatives, the CEO still thinks that United Breweries can make it through any difficult period for the business.

United Breweries has done a good job of maintaining a strong balance sheet in order to ensure its continued success. Debt-to-equity ratios have fallen over the first six months of 2017, and the company maintains AA+ ratings on its bonds with a stable outlook going forward. Reductions in total liabilities have boosted shareholder equity, and that has shown up in the company's share price movements so far this year.

United Breweries investors seemed to be content with the results, although the stock didn't make any major moves in either direction following the announcement. If the Chilean economy can bounce back from its current doldrums, then United Breweries should start to see its efforts result in even more positive momentum for its business going forward.

10 stocks we like better than United Breweries
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and United Breweries wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of August 1, 2017

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends United Breweries. The Motley Fool has a disclosure policy.