Compania Cervecerias Unidas (CCU)
United Breweries Company (Chile) $CCU
As a natural contrarian I am constantly looking for areas where the market could be wrong, for erroneous implicit assumptions that have been unconsciously absorbed by investors.
Don’t mis-understand me, the collective wisdom is usually correct and one has to be careful in betting against it. I remember early in my career believing that Blackberry was a great buy just because the market had decided it was going to zero (it was). But where the consensus is wrong it can be very profitable to take the other side.
For example at a similar time to my Blackberry folly some other popular narratives were that Apple could no longer grow (following the death of Steve Jobs it could never top the success of the iPhone) and that Microsoft was a staid, poorly run company (with Steve Ballmer at the helm). You may not remember this, but it was absolutely true and an objective fact that these companies traded at barely more than 10x P/E(!). It was enormously profitable to take the other side of this narrative.
Human beings are engineered for myopia. We are wired to believe that whatever the dominant narrative is right now will just keep rolling, uninterrupted, in perpetuity. Risk of Ruin Podcast.
One area of the market that is very out of favor currently is alcohol companies. The general consensus is that younger generations drink far less than prior cohorts. Survey data seems to back this up, a 2023 Gallup poll of US adults under 35 found that 38% don’t drink compared to 28% 20 years ago. There are many possible reasons for this including increased marijuana usage, less time spent socializing in-person etc.
And those that do drink are far less loyal to brands and no longer creatures of habit.
My stepfather claims that when he began drinking in pubs in the north of England, there were two beer options, ‘mild’ & ‘bitter’. Whether or not this is apocryphal, the options now available are staggering, from ‘Cat Spit Stout’ to ‘Old Leghumper’ to my personal favorite ‘Resting Bitter Face’ (I like the name anyway). Yes many of these brands are ultimately owned by the large behemoths, but the barriers to entry are certainly far lower, and the days of someone being a ‘Coors Light Man’ (it usually was a man) seem to be over.
This declining trend has been most pronounced in beer, where US per capita consumption peaked in 1981 and has since declined by 25% (while spirits & wine have seen growth). This narrative has resulted in beer companies around the world trading at historically low multiples of earnings and sales:
However, while many countries have seen lower per capita consumption, it isn’t necessarily true everywhere. Look at this chart of Chile, where beer consumption has very clearly replaced wine, resulting in strong long term growth for the beer category:
This data has been somewhat obscured by a few idiosyncrasies of CCU’s business that I will dive into below.
Some brief background on Chile
Leftist President Salvador Allende was ousted in an (alleged!) CIA sponsored coup in 1973. Military General Augusto Pinochet took over as leader and delegated economic policy to a group of Chicago trained technocrats. Following a deep economic and financial crisis in 1982 forcing the bailout of the banking system, Chile experienced an economic miracle of very high growth rates, transforming the country from one of the poorest in Latin America to one of the richest. Here’s a chart from Wikipedia which unfortunately only goes to 2017:
Pinochet eventually made way for democratically elected governments, which have swayed between center left & center right administrations. However, increasing unhappiness over societal inequality erupted in widespread protests in 2019, eventually leading to the election of 36 year old Gabriel Boric as the most left-wing President since Allende, as well as two ultimately failed attempts to rewrite the country’s Pinochet-era constitution. This uncertainty has spooked financial markets and dampened investment, leading to anemic economic growth in recent years. However Chile is far more institutionally robust than most other countries in Latin America (Venezuela, Argentina, even Mexico for example) and so Boric has been limited in his ability to pursue a hard Left agenda. The next President is expected to come from the Right when the country goes to the polls in November.
I should also note that Chile’s rapid growth was aided by being the world’s largest producer of copper (though 2nd on that list is the DRC, a prime example of how resource wealth can be a hindrance rather than help). Production has been falling in recent years due to tightening environmental regulation which has further dampened economic growth.
Finally in response to the COVID-related economic slowdown of 2020, the (then Right-wing) government enacted an enormous stimulus in 2021 by allowing citizens to withdraw cash from their retirement accounts. We will see this effect below in enormous growth in consumer spending, part of which was spent buying beer!
Tariffs
Given Trump’s recently announced 50% tariff on copper imports I will make a brief comment. As I understand them tariffs are a tax on consumption, no different to a sales tax. The higher the tax, the higher the price to the end consumer. Any economics text book would tell us that higher prices = lower demand (to the extent that demand is elastic). Lower demand and, all else equal, supply held steady, means lower prices. Yes I know the spot copper price has risen, but this reflects as much as anything a desire to acquire copper immediately to beat the August 1st deadline. And of course when I say lower prices, I mean ex-tariff prices which are what matter to the exporter, in this case Chile.
Compania Cervecerias Unidas (CCU), aka United Breweries Company
CCU is the leading beer company in Chile with close to 70% market share under its own as well as Heineken’s brands. They also distribute Pepsi (since 1959!), water (in JV with Nestle), juices, wines & spirits (including the national liquor pisco) in the country. In addition CCU is the junior player in a beer duopoly in Argentina, with roughly 1/3rd of the market. Most recently CCU have established a brewery in Colombia where they have built up 6-7% market share.
CCU is controlled by a 50/50 JV between Heineken and local Chilean-Croat family the Luksic group. The JV holds 66% of CCU’s shares. You will of course know that Heineken is one of the largest brewers in the world (2nd in fact behind Anheuser Busch in sales).
You may not be aware that the Heineken family continues to control the business to this day, headed by Charlene de Carvalho-Heineken and her husband Michel de Carvalho (a former child actor who appeared in Lawrence of Arabia and is a former Olympic skier, although I digress).
The Luksics are the richest family in Chile (worth north of $20bn) and one of the most successful business groups in emerging markets. Greatest hits include deftly guiding London listed, $23bn copper miner Antofagasta through numerous commodity cycles, as well as a highly contrarian bet which turned a roughly $2bn investment in the container shipping industry into around $12bn within a little over a decade.
The partnership between the Heineken & Luksic families has lasted over 20 years. The Luksics in their various businesses – which also include the leading bank in Chile in JV with Citigroup – typically hire very young, highly competent executives. Thus in contrast to a typical multinational subsidiary, in Chile Heineken has never parachuted in a CEO on a 3 year rotation. In fact the CEO here, Patricio Jottar, has been in place since 1998 - even before Heineken’s involvement - when he was just 36 years old.
Indeed there is only one Heineken appointee out of the 8 in the executive team, Juan Boned, the Controller. So this creates continuity and local decision making, but also is indicative of the level of trust Heineken has in the local operation and partner.
The Heineken-Luksic JV most recently acquired a 4.3% stake in CCU via a tender offer in June 2021 at $19 per ADR, considerably above today’s price.
The Domestic Market
The way the company reports, it shows Chile as a whole which includes soft drinks, water, juices, wines and spirits. However the Head of IR was generous enough to share his estimates for the beer category which I include below:
So over the long run the beer category has grown slightly in contrast to the US, although recent years have been subdued due to a weak economy. In $ terms this volume has turned into fairly healthy 4% sales growth. The local currency has depreciated substantially over both a 5 and 10 year period (5% a year), so local currency growth would look a lot higher. Ultimately it is hard currency that global investors should care about (to the extent that the Dollar is hard currency!), but when the currency depreciates a lot it can be hard even for a company with strong pricing power to pass that through immediately to customers.
This headwind could well abate and even reverse which would be helpful for the company. I would note that current copper prices are an elevated $4.50 per pound which provides a big boost to the economy. Last year the country produced 12bn pounds of copper, worth over $50bn at today’s prices in an economy of $330bn.
Argentina
“There are four types of countries: developed, underdeveloped, Japan and Argentina” Simon Kuznets, Nobel prize winning economist (1960s).
The most important idiosyncrasy of CCU is its substantial Argentine business which generated a quarter of sales in 2024.
While Chile’s output has overtaken its neighbor on a per capita basis, Argentina’s 47m population compared to Chile’s nearly 20m gives it an overall economy twice the size.
Argentina is an extremely difficult place to operate with very complex regulations and an inflation rate that has exceeded over 100% on average over the past 3 years.
Returning to the concept of narrative the current consensus portrays Milei as a zealous reformer that is breaking the back of inflation with his deregulatory agenda. While the data thus far is impressive there have been many false dawns during 80 years of economic mismanagement in the country. After all Argentina (9) sits just behind Ecuador (10) and Venezuela (11) at the top of the charts for most sovereign defaults since 1900.
Here is a chart of annualized inflation showing Milei’s progress since he took charge in December 2023:
Moreover, while he holds the Presidency, Milei is supported by a very weak coalition in government. Hence if his public popularity wanes it will be very difficult to continue with his agenda. A key test lies ahead with midterms in October of this year. Then Milei will have to face reelection in 2027.
What is interesting though is that while local Argentine stocks reflect a much more optimistic outlook than before Milei took office, with Banco Galicia (bank, +200%), Pampa (power gen, +71%), Loma Negra (cement, +72%) and Telecom Argentina (telco, +47%) all up strongly, CCU is down 20% over the same period. All of these figures are in $.
Due to the wonders of manipulated forex rates and inflationary accounting it is very difficult to get a true picture of CCU’s business in the country. For what its worth here are the numbers in US$:
As you can see the numbers are all over the place. In 2023, when Millei became President in December, he massively devalued the currency which I believe impacts the revenue number for that year (let me know if you want to debate my interpretation of inflationary accounting!).
And in 2024, while revenues show growth in $ terms, CCU’s Head of Investor Relations shared with me that beer volumes fell 25% - which would be a truly unprecedented drop for a staple in a normal economy.
In any case over the long run $ sales growth has been slightly below Chile at 2.5%. And profitability has been a major drag.
But CCU doesn’t need Argentina to become Switzerland. As a former colleague was wont to point out, a group of Brazilians managed to parlay their ownership of a local brewer in an inflationary economy into dominance of the entire global beer industry (the Brazilians in question are the largest shareholders of Anheuser Busch Inbev today, as well as Burger King & Kraft Heinz too). Their story demonstrates that with sufficient pricing power a business can overcome and even benefit from moderate inflation.
So if things go from terrible to slightly less bad, there is potentially a lot of money to be made. CCU has been unable to pay out a dividend from Argentina since 2018. Its competitor Ambev (a subsidiary of ABI) uses an abstruse maneuver to get money out of the country which bears an effective cost of 50%, whereas CCU has preferred to reinvest in local assets, including a stake in Danone’s water business, as well as real estate. If Argentina were to normalize somewhat and loosen capital controls, CCU could repatriate capital and return some of it to shareholders without incurring hefty costs.
Colombia
Finally there is a joint venture with local soft drinks brand Postobon in Colombia. Colombia sits between Chile & Argentina in terms of the size of its economy. Historically the beer industry has been monopolized by Bavaria (today owned by ABI) with close to 100% market share, although CCU’s JV has started to make inroads having invested almost $500m to build a brewery which opened in 2019. I estimate that they have 6-7% market share today though the business is yet to break even. The JV is not included in consolidated revenues but CCU’s share of losses detracts from net profit (though these are small at around $10m a year).
What’s been brewing
Here is the consolidated picture adding Chile & Argentina together:
The last 2-3 years have been very challenging, and margins in particular have suffered. For a brewer with 2/3rds of the market to be making barely double digit EBIT margins is really quite unprecedented (at the other extreme, Ambev in Brazil makes twice that). However I don’t believe that the business has been fundamentally impaired.
The other notable point is the level of net debt which is on the high side at 3x EBIT. The company has been quite opportunistic with its balance sheet: for example raising $600m in equity in 2013 when the stock was very expensively valued, and again taking out $600m of historically cheap 10 year Dollar debt (paying 3.35%) in January 2022. The company hasn’t found anything to do with this debt to date so has over $500m sitting in US$ bank accounts earning more than 3.35. This is a nice war chest to have if there was an opportunity to buy something on the cheap.
Valuation
Firstly here’s a chart from Capital IQ showing CCU has basically never been cheaper relative to sales in modern history:
I think it’s a lot easier to take the two main businesses separately. Chile is a pretty straightforward, stable low-growth business. Using $2bn of sales, a 15% EBIT margin, that’s $220m after tax. At a miserly 12x P/E that’s worth the market cap alone, a little over $2.6bn.
Then you have Argentina which is worth at least $200m, based on $900m of sales, a 10 year average EBIT margin of 7% which makes for $40m post tax and a 5x P/E. But these are very miserable assumptions. In a bullish scenario Argentina could easily be worth $1bn.
Lest you think that $1bn is plucked out of the air, I constructed a highly sophisticated model to derive it: I take Chilean sales per capita ($90), divide by 2 for market share differences, multiply by the Argentine population (46.5m) to get sales of $2.1bn. To this I apply a 10% EBIT margin, which taxed at the statutory rate of 35% gets me to $135m of annual profit. At a still lowly 7x P/E that is $1bn!
Hmm, perhaps I should have added a few decimal places to my estimate to add some credibility. In any case, the point is not to get to a precise valuation of the Argentine business, it is to show that there is large potential upside here and in owning CCU you get this optionality essentially for free. To emphasize, the likelihood of a large payout (the market valuing Argentina at $1bn) is low, but you are not paying much for this possible scenario.
Similarly I assume Colombia is worth nothing today, but CCU has put at least $250m into the venture over time, so it could well be worth something. The controlling shareholders are very shrewd capital allocators after all.
Risks
The key assumption above is that the Chilean business is not fundamentally impaired and that margins return to the long term trend. I believe I have demonstrated that in contrast to the US where beer consumption per capita peaked in 1980, Chile is not in long term structural decline. Rather CCU has suffered from a weak economic environment. However nothing fixes margins like a return to growth and applying some operating leverage to the business.
In terms of Chile, the copper price is currently elevated, sitting at record prices. I expect this to be a boost to the local economy, although clearly if prices were to fall this would have the opposite effect.
The copper price also has implications for the local currency which is freely floating and not interfered with by the Central Bank or government. CCU sells its beer in Chilean Pesos and so to the extent that the currency depreciates versus the currency in which your own liabilities are denominated you get short-changed. That said, we don’t live in a ceteris paribus world. CCU has dominant market share and will seek to raise prices sufficiently certainly to cover raw material costs (many of which are priced in hard currency) and indeed maintain their owners’ purchasing power in the long run. Heineken has $/€ debts to service after all.
As I mentioned the Chilean Peso has depreciated against the Dollar over time (5% a year), far in excess of the inflation differential with the US and sits close to 10 year lows. On my favorite macroeconomic indicator, the Economist’s Big Mac Index, which compares the cost of a cheeseburger around the world, the Peso is modestly undervalued (-22% vs fair value), although not at the extremes of India (-55%), Indonesia (-56%) or Taiwan (-59%). This data hasn’t been updated since January, though perhaps not coincidentally the Taiwanese Dollar has been one of the best performing currencies year to date!
Having made investments in Chile for 15 years I have a high degree of faith in local institutions, which many others will understandably not share. I recently heard a prominent market observer likening Chile to Argentina’s political environment which couldn’t be further from reality. The country can elect leftist politicians but the rule of law, due process and independence of institutions such as the Central Bank and judiciary will remain in tact.
On Argentina, I refer readers back to the Simon Kuznets quote. The country has found new and innovative ways to disappoint investors many times over the decades. To be clear I have no other Argentine related investments and am not necessarily bullish on local assets in general but in this case I think the risk and reward are adequately priced.
Could things deteriorate in Argentina? Absolutely! Would this be disastrous for CCU - which with its 33% share of the beer industry earned a 3% EBIT margin in the most recent financial year - I don’t believe so.
I will just add one final point. In contrast to a number of the other companies I’ve profiled with ADRs (American Depositary Receipt), CCU’s listing is ‘sponsored’. An unsponsored ADR is a creation of a bank that takes it upon itself to build a conduit through which US investors can access an underlying overseas security. The underlying company has no involvement in this process. However a ‘sponsored’ ADR is at the initiative of the company and therefore comes with reporting requirements as well as the ability for ADR holders to pursue the company through the US legal system. CCU has the highest level of ADR (level 3), which enables it to raise capital in the States, which it first did in 1992. Clearly one shouldn’t go into an investment expecting to fall back on a class action lawsuit, but the fact that the company has chosen to subject itself to these rigors should offer a degree of comfort.
Conclusion
In sum CCU is a very well governed beer and drinks group with dominant market share trading at a reasonable valuation and an indirect beneficiary of high copper prices, as well as optionality in its Argentine operation. Buy.
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Disclaimer
This article is purely for informational and entertainment purposes and should not be construed as investment advice. Please consult a financial advisor before making any investment decisions.
Please also assume that I own and intend to trade any stocks discussed before and after dissemination of this report.