BUD - Anheuser-Busch InBev: Focus On The Right KPIs

2023-04-29 02:01:18 ET

Summary

• Beer consumption remains stable during the times of recession, suggesting that BUD could be an interesting investment idea for a recession.
• Anheuser-Busch boasts higher profitability compared to its peers, while showing strong growth internationally, both expected to continue going forward.
• Our DCF model suggests fair share value at $73, meaning 12% upside to the current share price.

In our previous article on Anheuser-Busch InBev SA/NV (BUD) almost one and a half years ago, we issued a Hold recommendation on the stock with an estimated the fair value of $61/share.

BUD stock hovered around that value for a while, gradually declining along with the market in 2022. However, the things changed drastically when the company published its Q3 2022 results at the end of October 2022, while raising its FY 2022 forecast. This resulted in a share price surge to $67 at the end of March '23.

Investor's gain: Since publishing of our article , BUD stock delivered just over 10% in total return, while the total return for S&P 500 comprised negative 9%.

Today, we take another look at BUD stock as an idea for a potential recession.

Beer Consumption Remains Stable

There's a reason why Anheuser-Busch InBev SA/NV belongs to the Consumer Staples sector. Beer consumption remains stable during the boom times and the times of recession.

Below is a chart from Statista, outlining beer consumption in the U.S. As you can see, even during COVID-19, which caused a major disruption in consumption patterns, beer consumption volume actually increased.

Beer is also referred to as affordable luxury, which becomes one of the few options available to consumers with shrinking disposable income. According to an analysis by Goldman Sachs , historically there has been little correlation between economic growth and beer consumption.

Therefore, we are not concerned about a major decline in company's sales in a case of potential recession.

Recent Bud Light Ad Controversy

Ironically, Anheuser-Busch was very proud of its marketing efforts in its FY 2022 earnings presentation in March 2023, showing off various marketing awards. The company invests impressive $7bn a year in marketing.

However, yesterday's marketing success turned into a PR nightmare when a trans influencer Dylan Mulvaney posted a video on April 1st encouraging her 1.8m followers to celebrate March Madness with Bud Light. The video caused a backlash among conservative Bud Light drinkers, who vowed to boycott Bud Light and other AB InBev products.

The story created a lot of controversy online, however, made hardly any impact on BUD stock price. To see why, let's refer to the regional breakdown of AB InBev's sales. Bud Light is indeed the best-selling beer in the United States. However, the whole North America accounts for less than a third of AB InBev's revenues.

Therefore, even a sizable Bud Light sales drop in the U.S. would not break BUD's spine. From the international perspective, there has not been much reaction to the Mulvaney video, therefore, making its impact on sales negligible. This would also clarify, why Mulvaney commercial had almost no impact on BUD share price.

North America remains one of company's key regions, however, it has been slowly declining. in BUD's FY 22 earnings, management focus was clearly on other regions such as South America and Asia Pacific. South America demonstrated an impressive 28% revenue growth in 2022, mostly due to higher revenue per hl. With the opening of China in 2023, AB InBev's management is optimistic about the industry recovery in the region.

2022 Financial Results and Outlook

Anheuser-Busch InBev posted solid $57.8bn in revenues in 2022, up 6.5% y-o-y. Most of it came from the increased price per hl, as we mentioned above. This can be seen as the result of company's strategy to premiumization in the past several years or, more likely, passing of inflationary costs onto customers. One important KPI that drew our attention in FY 22 results was Gross Profit, which despite the growth in revenues did not change y-o-y in 2022, with gross profit margin actually decreasing from 57.5% in 2021 to 54.5% in 2022. We believe this shows that whatever premium AB InBev charges its customer, the extra revenue has to be passed on to suppliers in COGS. In our opinion, Gross profit margin is one of the major KPIs to watch in Q1 23 results.

To watch: Gross profit margin improvement (if any) in Q1 results on May 4th.

Walking down the P&L, in 2022 Anheuser-Busch did a good job of keeping its SG&A expenses stable and generated strong $8bn cash flow and $3.03 in underlying EPS.

Despite the slight decline in profitability during the COVID-19 years, Anheuser-Busch InBev SA/NV still boasts higher levels than its peers across all profitability margins.

The company proposed to pay €0.75 in dividends ($0.82), which currently comprises 1.25% dividend yield and 25% payout ratio.

Historically, Anheuser-Busch used to pay higher dividends. However, the practice came to a halt during the COVID-19 pandemic. Company's management follows a three-pilar strategy for capital allocation, as shown above. Since no major debt repayment is planned for the current year, we can assume that AB InBev raises its dividend in 2023, making the stock more attractive for dividend investors.

Strong Balance Sheet

Despite the common perception that Anheuser-Busch InBev is drowning in debt, as of December 2022 the company had around $80bn in debt on its books and $10bn in cash. Net Debt/EBITDA ratio went down to 3.51x in 2022, approaching company's target of 3x.

There are no major debt maturities till 2026, which can give AB InBev time to invest in organic or inorganic growth or return some capital to shareholders.

The interest expense is also held in check with 95% fixed-rate debt and 4% pre-tax coupon. Therefore, we believe Anheuser-Busch is well-poised for implementing its growth strategy in the next several years.

DCF Model Update - Anheuser-Busch InBev SA/NV

We have updated our DCF model to account for higher revenue growth caused by inflation and respectively increased the WACC to 6.7% from 6%.

Revenue growth

We use a mid-single digit revenue growth in the next three years. For the years after that we use a 3.5% growth rate until 2032, which reflects the fact that BUD is a mature company and is on the higher side of its CAGR in the past 5 years. These assumptions are in line with analyst estimates. We keep terminal growth rate at 2%.

Operating Margin

Historically AB InBev's operating margin was hovering around 30%. However it dropped to 25% during corona. As a conservative estimate , we keep the operating margin at 25% going forward.

Reinvestment

We have decreased our reinvestment estimate from $5bn p.a. to $2.6bn based on historical expenditures.

WACC

We used 6.7% weighted average cost of capital. The effect of increase in inflation and interest rates on WACC since our previous article has been partially compensated by a lower beta of the BUD stock since 2021 (dropping from 1.42 in 2021 to 1.12 today).

As a result, we come up with the estimated fair value per share of $73, suggesting 12% upside potential to the current price.

Relative Valuation

BUD's relative valuation appear to roughly in line with its peers such as TAP and SAM .

Conclusion

Anheuser-Busch InBev is about to publish its Q1 '23 results on May 4th. We suggest paying attention to such company's KPIs as Gross Profit Margin improvement and business development in China. Company's results will not incorporate any potential drop in volumes after the Mulvaney video, however, the company might give some colour on that in the Q&A session. Potential revenue drop in the U.S. might present an attractive buying opportunity for BUD, since our DCF model suggest a fair value at $73/share.

We believe Anheuser-Busch InBev presents an interesting recession stock pick due to beer consumption resilience during the times of recession, company's expected strong performance and upside potential based on our DCF model.

To watch: BUD earnings on May 4th, 2023.

Editor's Note: This article was submitted as part of Seeking Alpha’s Best Investment Idea For A Potential Recession competition, which runs through April 28. This competition is open to all users and contributors; click here to find out more and submit your article today!

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