AmBev Shares Downgraded To Equal Weight At Morgan Stanley

Morgan Stanley has downgraded Ambev SA (ADR) ABEV to Equal Weight from Overweight on balanced risk-reward and near-term headwinds.

"We continue to see a positive long-term story, but believe trends will remain more difficult near term," analyst Jeronimo De Guzman wrote in a note.

In the near term, AmBev will face volume weakness and inflationary pressures in food and beverage categories, and pricing challenges from taxation and product mix. Further, limited sales growth and higher costs will pressure margins.

The analyst expects the trends to improve only gradually in 2017, as employment/wage trends may take time to fully recover.

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"Our analysis of pricing trends also suggests that product mix explains 200-250 bps of lower Brazil Beer realized pricing, and some of these pressures could continue into 2017," Guzman noted.

As such, the analyst cut estimates, resulting in a decline of 6 percent in EBITDA for 2016 and 8 percent in 2017. However, the analyst raised the price target to $6.40 from $6.00.

Moreover, Guzman said the valuation is "full" with the shares now trading at a P/E of 23.8x 2017 earnings estimate, which is above the 20.5x historical average and on the higher end of global brewers.

"While some of this is warranted given AmBev's industry leading asset returns and strong execution/management, we see limited scope for upside surprise. Of note, we see downside risk to market expectations, as our EBITDA estimates are below consensus by 6 percent in 2016 and 10 percent in 2017," Guzman added.

ADRs of AmBev closed Wednesday's regular trading at $6.25.

Full ratings data available on Benzinga Pro.