How This Little-Known Beer Maker Got Its Growth Back

Beverage stocks have been a hit-or-miss proposition in the U.S., both for megabrewers and for smaller players in the craft beer, spirits, and soft drink industries. But there are plenty of opportunities internationally to invest in the companies that produce drinks. In Chile, Compania Cervecerias Unidas (NYSE: CCU) produces beer, wine, and soft drinks for several South American countries, and after having seen a slow period to finish 2017, CCU had hoped to find ways to bounce back to start the new year.

Coming into Wednesday's first-quarter financial report, CCU investors expected the company to keep coming up with the modest gains in sales and earnings that they've seen over time. CCU's results bounced back from weakness in the fourth quarter of 2017, and the beverage company sees good times ahead for its market.

CCU warms up

CCU's first-quarter results reflected a nice bounce in earnings growth. Net sales were higher by 5.2% to 472 billion Chilean pesos, and that figure was in line with what most of those following the beverage stock had expected. Net income jumped 22% to 56.7 billion pesos, doing better than the consensus forecast among investors and doing far better than the flat performance that CCU's bottom line gave in late 2017.

Fundamental metrics showed the improvement at CCU. Consolidated unit volume growth accelerated to 3.7%, yielding production of 7.61 million hectoliters. Price increases of 1.5% on average also helped to bolster top-line growth.

The big success for CCU came from its international business, where volume sold in its Argentina, Uruguay, and Paraguay markets soared 22%. That helped boost segment revenue by 16%, although local-currency fluctuations held back the unit's pricing power in Chilean peso terms. More efficient operations lifted segment adjusted pre-tax operating earnings by nearly two-thirds from year-ago levels, with reductions in expenses responsible for most of the strong performance.

Chile continued to struggle, although CCU did a good job of battling adverse trends. Unit volume was down 1.7%, but nearly 6% higher prices helped to generate a 3.7% boost to Chilean revenue. Weather conditions weren't quite as favorable this year as they were in the year-earlier period, but here, too, better gross margin helped to offset downward pressure elsewhere, and the segment's bottom line improved by 7%.

For the wine segment, the weak U.S. dollar weighed on results. Segment sales fell 7.6% on a 6.8% drop in volume, and operating costs remained high following subpar harvests in both 2016 and 2017.

What's ahead for CCU?

CEO Patricio Jottar sees the year shaping up well. "Over the course of 2018," Jottar said, "we will continue to implement our sustainable and profitable growth strategy supported by our ExCCelencia CCU program in all of our operating segments, through further revenue management initiatives, efficiency gains, focus on execution and our strong portfolio of brands."

One interesting transaction occurred after the quarter ended that could have big implications for the company. CCU said that on May 2, Anheuser-Busch InBev (NYSE: BUD) followed up on its earlier agreement with CCU to exchange certain brands in the Argentina beer market in order to address potential antitrust problems that A-B InBev might have faced. Under the deal, CCU gave up its license to sell the Budweiser beer brand in Argentina through 2025. In exchange, A-B InBev paid CCU $306 million and gave CCU rights to produce a portfolio of other brands, including Isenbeck, Iguana, Goddess, North, and Baltic. The deal will be an interesting one to watch play out, especially since the Budweiser relationship has played a big role in CCU's growth for a long time.

CCU investors seemed reasonably comfortable with the performance, and the stock was up just a fraction of a percent at midday Thursday following the late-Wednesday announcement. With the Southern Hemisphere's summer months having helped to restore confidence in the beverage company, CCU looks poised to continue its long-term upward trajectory throughout 2018 and beyond.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Anheuser-Busch InBev NV. The Motley Fool recommends United Breweries. The Motley Fool has a disclosure policy.