BUDFF - Anheuser-Busch InBev: Choppy Waters Ahead Yet Fine For The Long Term

2023-04-12 08:21:27 ET

Summary

• BUD has been caught in a bad news cycle because of consumer polarization around its recent marketing campaign.
• Preliminary data indicate that Bud Light sales, the company's biggest product, could very well be affected.
• Since there is already negative price action simply because of uncertainty, actual numbers indicating sales underperformance could very well lead to more depreciation.
• However, it is also clear that the company is large and diversified enough to persist through this situation and do just fine in the long term.
• This long-term outcome is further made possible because of the firm's excellent profitability metrics as compared to its brewer peers.

Overview

Anheuser-Busch InBev (NYSE: BUD ) has been in the news lately due to its controversial new marketing campaign, which formally began on April 2 ^nd . While I won’t render a value judgement on the content of the campaign itself, I do want to highlight that this appears to be a material (read: impacting sales) event that has introduced fresh uncertainty into the stock. This controversy is also occurring against the backdrop of an investigation into alcohol pricing by the FTC – although this has nothing to with Anheuser-Busch.

In either case, the news cycle is certainly against BUD at the moment. A few headlines tell the story best:

1. Fox News | Bud Light Suffers Bloodbath as Longtime and Loyal Consumers Revolt
2. DailyMail ((UK)) | Bud Light Distributors in the Heartland and the South Are Spooked
3. New York Post | Bud Light Boycott Has Legs

These headlines and the boycott underpinning them have been fed by ongoing rancor on social media, including a video of Kid Rock shooting apart a stack of Bud Light cans with a submachine gun.

I’ll note that these headlines are quite likely hyperbole, as headlines often are. Nonetheless, there appears to be some preliminary data indicating that this boycott could very well be real.

New York Post's article referenced data from consumer product analytics firm Circana, which stated that Bud Light sales were down 0.4% YoY through March 26.

From the DailyMail article, data of a more anecdotal nature indicate that volumes have already declined within some core markets.

A quick look on Twitter (as a quick alternative data reference) shows that the campaign is alive and well, with fresh content of people pouring out bottles of Bud Light as well as referencing a decline in sales across establishments near to where they live. This really appears to be an ongoing consumer revolt, albeit one that we don’t have hard data for as of just yet. I’ll present my take on what this means for both the short term and the long term around for this stock.

Short Term

Worth noting is that the stock has already begun experiencing some volatility as a result of this situation:

This choppy chart shows us that the market is as yet unsure of what’s going to happen with the company. Yet, it’s also clear that the market has already begun pricing in uncertainty. In the absence of data, this makes sense – it’s difficult to really render a judgment on BUD’s prospects. Nonetheless this is a quantitatively significant and visible indicator that the cloud of uncertainty is now real.

The second that we do get hard data on Bud Light sales, you can bet that the stock will move again. If Bud Light sales stay at par (0% YoY), I expect that the company will almost immediately regain its prior share price of around $66.50. Given the dearth of an immediately identifiable upside catalyst here, I don’t see a situation in which the stock appreciates above its recent price in the near term.

If Bud Light sales fall below par, however, I think the downward reaction will be more severe - and could amount to an immediate 5-8% drop in the share price. This will no longer be the price of uncertainty; this will be investors pricing down the stock on the basis of underperformance in its core product. The ticker is BUD, after all. This would constitute a fairly significant short term price decrease. Based on the anecdotal data and the ongoing social media situation, my gut tells me that sales data will indeed come in underperforming in the short-term and that the stock will react accordingly. We can’t be certain, of course.

Furthermore, we need to keep in mind that BUD is already trading well below its historical price – yet well above its 2 week historical moving average. This creates fertile ground for the potential short term correction noted above.

Long Term

In the long term, I think BUD will be just fine and continue to trade at current multiples. News events often have an outsized short-term impact on share prices, and then fade away. Furthermore, BUD is both massive and well-diversified. Of the 7 companies in the Brewers category, BUD is by far the largest. As of this article it has a market capitalization of $131.61B, while the other 6 put together have a market capitalization of $148.68B. BUD is 47% of the entire market on a market capitalization basis.

As to diversification, we can note just how internationalized this company is while also considering its revenue mix:

Since this is the brewing business, we must also keep in the mind the very real economies of scale involved here. The more beer you brew, the cheaper each beer is to brew. This allows BUD to handily outperform its peers on bottom-line metrics. A quick review shows us that BUD crushes the competition across every bottom line metric.

The story is a bit more complex for the top line, however. BUD is not growing as fast as its sector. Indeed, it is likely this that has led to the company more assertively marketing its products. A decrease in sales for its core product would see it fall to the bottom of the sector, given that it isn’t far off now. That would create a steady price for the stock that has less future growth baked in. I see this outcome as relatively likely.

Since it seems that BUD’s valuation is quite close to the sector’s median (sensible considering that it is itself almost 50% of the sector), this will be the number to watch. I think that BUD can maintain these levels of profitability without too much growth when we consider its outsized performance on bottom line metrics.

As such, it’s quite possible for it to retain a ‘fair’ (sector median P/E multiple) valuation even if growth drops off somewhat – which is what I mean when I say that the company will be just fine for the long-term.

Conclusion

The jury is still out on BUD. I reiterate that I believe this current situation is temporary and that the company will stabilize in the long-term – alcohol is one of the steadiest businesses there is. Nonetheless, short-term volatility looks to be on the horizon.

Additionally, this isn’t a company that has too much growth to spare when we compare it to its peers. Yet, its excellent profitability metrics should keep it afloat even if growth stalls – which will maintain a reasonable (sector median) multiple for its shares. Investors should look to the results on that metric in particular as this company trades very much in line with those numbers specifically. I think it’s most fair to call this a hold for the time being.

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