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Quinsa: The Next Treasure in The Emerging Market of Argentina Argentina is a vast treasure trove of natural resources and agricultural goods. Argentina real estate is beginning to boom, and companies are moving their outsourcing centers from India to Argentina because of the country’s well-educated – and cheap – workforce. And in this emerging market, there are bargain-basement investment opportunities, including Quinsa SA, an independent brewery company with a stronghold in the Argentinean domestic beer market. Three years after the largest debt default in modern history, Argentina is staging a steady economic comeback. In the late 1990’s, Argentina was a Wall Street darling. American investors pumped money into the country like mad. But the country was borrowing vast amounts and overextending itself. By 2001, Argentina hit the wall and a catastrophic economic collapse ensued. Fortunes evaporated overnight. Riots broke out. Unemployment soared to 20% and poverty levels soared to new highs. The economy contracted an ugly 11%. There was no way the flailing Argentinean government could even begin to pay back its IMF loans or honor its bonds. The country devalued its peso, which had been artificially pegged to the US dollar. Today, one dollar equals roughly three Argentinean pesos. Argentina: An Emerging Market That’s Now the Argentinean economy is beginning to pick itself back up. Just two months ago, private creditors and bondholders finally accepted a debt-restructuring offer, and the South American country has managed to sell nearly $100 billion worth of debt in a harsh, take-it-or-leave-it offer. Argentina is quickly becoming one of the most vibrant destinations for living, traveling and investing. Real estate is beginning to boom. The country’s real-estate crash created some of the best bargains in the world with low prices attracting attention from across the globe – especially given the prices in Europe these days. The emerging market of Argentina is a vast treasure trove of natural resources, agricultural goods, and qualified labor. Many companies are even beginning to move their outsourcing centers from India to Argentina because of the country’s well-educated (and cheap) workforce. A bigger interest in tech is also sweeping the nation. Argentina recently announced its intent to invest $10 million in nanotechnology over the next five years. Medical, automotive, and optical uses top the funding priority list. Now $10 million might seem like small potatoes compared to Bush’s nano funding bill of more than $3 billion, but to a country in the throes of a complete economic rebuilding, it’s an awful lot. Though political turbulence is far from being resolved, the worst appears to be over on the economic front. But there are still bargain-basement opportunities in this country for savvy investors. This could be your last chance to scoop up these undervalued investments. And one of these is an undervalued company with a monopoly on Argentina, Chile, Uruguay, and several other South American countries. Quinsa: The South American Budweiser Though headquartered in Luxembourg, Quinsa SA (LQU:NYSE) is an independent brewery company that produces beer in Argentina, Chile, Uruguay, Paraguay and Bolivia and soft drinks and mineral water in Argentina and Uruguay. Quinsa dates back to 1888, when it was founded in Paris. Two years later, the company established a brewery in Argentina. Its staple brand of beer, Quilmes, became as prevalent there as Budweiser is in the US. Over the years, the company gradually expanded to neighboring countries like Bolivia, Paraguay, Uruguay, and Chile. As an independent brewer, Quinsa enjoyed a more than 75% stronghold in the domestic Argentinean beer market for many years. But it began to struggle as competition started to encroach on its territory and Brazilian company AmBev really gave Quinsa a run for its money. Then, in 2002, as the Argentinean economy was collapsing, beer suddenly wasn’t the first priority on consumers’ minds. Quinsa’s net sales plunged to $468.6 million, less than half the $938.7 million from 2001. This Independent Brewery Company of Quinsa Makes You Say: But as the economy began to recover and beer sales improved, Quinsa realized that AmBev’s lower-priced Brahma brand was really stealing its thunder. Rather than engage in an expensive fight for sales, Quinsa made a strategic move to join forces with AmBev, acquiring several other brands and distribution rights. Though still two separate companies, the Quinsa-AmBev merger has enhanced growth on both sides. Quinsa also enjoys bottling and franchise agreements with PepsiCo, accounting for 100% of PepsiCo beverage sales in Uruguay and more than 80% in Argentina. From the Bottom Of the Beer Barrel, Looking at Quinsa’s five-year chart, you can clearly see how shares got battered in tandem with the collapse of the wider economy, hitting rock bottom in 2002 after the peso devaluation. Since then the stock has steadily risen to today’s price of around $23. It has consistently nailed higher highs and higher lows, and has already appreciated roughly 40% in 2005. But it’s certainly not too late. LQU has a forward P/E of 10, and is still extremely undervalued with a PEG ratio of 0.6. As the economic conditions in Argentina and its neighbors continue to improve, higher beer sales follow. After healthy sales growth last quarter, Quinsa is on track to post a 31% increase in earnings growth this year. FY 2004 showed a 23% rise in net sales and a 60% rise in net income. I think there is still plenty more upside for Quinsa’s stock. Looking at sales, earnings growth and the P/E, I estimate that LQU would be fairly valued at $44 to $47 a share – a potential 102% gain over current levels. |
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