BUD - Anheuser-Busch InBev: The Uninspiring Investment Case Of A Struggling Behemoth

2023-12-07 01:04:15 ET

Summary

• Anheuser-Busch InBev is the world's largest brewer with a portfolio of over 500 brands and operations in over 150 countries.
• The company has a strong track record of financial performance but faces challenges such as the declining popularity of large premium pilsner brands and declining beer consumption per capita.
• BUD's profitability and cash generation are strong, but it is facing inflationary pressures and the impact of a recent boycott on Bud Light sales.
• Future revenue growth will be mainly driven by increasing prices in developing countries.

Company introduction

Anheuser-Busch InBev SA/NV ( BUD ) is a Belgian-Brazilian multinational beverage-alcohol and soft-drinks company. It is the world's largest brewer by volume, and one of the largest producers of non-alcoholic beverages, with a portfolio of more than 500 brands, including:

• Global brands: Budweiser, Corona, Stella Artois, Becks, Hoegaarden, Leffe, and Brahma
• Regional brands: Bud Light, Michelob Ultra, Modelo Especial, Cass, Harbin, and Skol

AB InBev has a global reach, with operations in over 150 countries. The company employs over 165,000 people worldwide.

Here are some of the key facts about AB InBev:

• Founded: 2008
• Headquarters: Leuven, Belgium
• Revenue: US$57.8 billion (2022)
• Net income: US$ 6.0 billion (2022)
• Market capitalization: US$125.9 billion
• Number of employees: 167,000 (2022)

AB InBev is a well-respected company with a strong track record of financial performance. The company has a strong brand portfolio and is # 1 worldwide brewer. Besides their operational efficiency, AB InBev faces some global challenges, including a declining popularity of large premium pilsner brands towards increasing popularity of craft beers and a declining consumption of beer per capita in general. Supporting factors are rising beer prices due to premiumization (explained below) and an increasing population.

Global #1 beer brewer

InBev's rich history is one of rapid growth through M&A activities. The company's current form can be traced back to two major mergers:

• Interbrew and Ambev merger (2004): In 2004, Interbrew, a Belgian brewer, and Ambev, a Brazilian brewer, merged to create InBev, the world's largest brewer at the time.
• InBev and Anheuser-Busch merger (2008): In 2008, InBev merged with Anheuser-Busch, an American brewer, to create Anheuser-Busch InBev, the world's largest brewer by volume.

Since its formation, AB InBev has continued to expand its portfolio through a series of strategic acquisitions. These acquisitions have helped the company expand its global reach, diversify its product offerings, and strengthen its position in the global beer market.

Two of AB InBev's most notable M&A activities are:

• 2009: Acquired Grupo Modelo, a Mexican brewer, for $20.1 billion, gaining access to the Mexican beer market and the popular Corona brand.
• 2015: Acquired SABMiller, a British-South African brewer, for $104.7 billion, creating the world's largest and most diversified brewer.

The acquisition of SABMiller was one too many. InBev overplayed its hand and vastly overpaid (~16.7x EV/EBITDA) to acquire the #3 brewer in 2016. The acquisition was fully financed with debt and existing liquidity (no new equity was raised). As a result, nearly 8 years later, the company is still overleveraged with a net debt to EBITDA totaling ~3.5x versus a targeted 2.0x, representing an optimal capital structure according to InBev. To digest the SabMiller acquisition, investors were put on a diet as dividends and payout ratio were cut drastically over the last years. Dividend was $ 3.60 per share in 2017 versus $ 0.5 per share since 2020.

InBev's story is one of strong global brands, high volumes, advantages of scale and accompanied high margins. The company's branding power is evident in its strong brand recognition, loyal customer base, and ability to command premium prices.

InBev's brands include some of the most iconic and recognizable beer brands. It has a portfolio of over >500 brands including:

• Global brands: Budweiser, Corona, Stella Artois, Becks, Hoegaarden, Leffe, and Brahma
• Regional brands: Bud Light, Michelob Ultra, Modelo Especial, Cass, Harbin, and Skol

Overall, AB InBev's branding power is a key asset that contributes to the company's success. The company's strong brand recognition, loyal customer base, and ability to command premium prices allow it to generate significant revenue and profits. According to InBev, the company owns 7/10 of the most valuable brands. The strongest competing brands include (1) Heineken, (2) Modelo Especial, (3) Coors & (4) Asahi.

InBev is both present in developed beer markets as fast growing beer markets.

Beer, an attractive consumer staple?

Compared to other consumer products the beer market is both large and profitable.

Market growth is the main issue. According to Statista , revenues from the beer market are estimated at $ 322 billion in 2023 or $ 42 per person. The market is expected to grow at a slow pace of 3.7% annually (CAGR 2023-2028). Statista expects only 1.5% of growth to come from volume increases. Since 2006 consumed beer volumes have been declining consistently, mainly because of the increase in popularity of hard liquors. This trend came to a stop in 2016. Since then, beer volumes have been picking up again at the expense of hard liquor and wine. It remains the question if the rebound will continue or will reach its sealing. Customer preferences are somewhat cyclical.

At first sight InBev did not benefit from the rebound of beer consumption. AB InBev's volume growth has been rather weak during the last 8 years. Volume growth averaged only 0.5% per year over the period of 2016-2019. Between 2019-2022 it averaged 1.9% growth per year. For H1 2023 the volume growth totaled only 0.6%.

When looking at the trends, market expectations and historical numbers, it is fair to say AB InBev's future revenue growth will mainly be driven by increasing the average revenue per hectoliter (NR/hl). Premiumization is a trend in the beer industry that has been accelerating in recent years. This trend is characterized by consumers shifting towards higher-priced, higher-quality beers. There are several factors that have contributed to this trend, including rising disposable incomes, increasing sophistication of consumers, growth of craft beers and marketing.

The premiumization of beer has had multiple impacts on the industry. One of the most significant impacts is that it has led to a consolidation of the industry. Large brewers have been acquiring smaller, craft brewers to gain access to their brands and expertise in producing premium beers. Additionally, the premiumization of beer has led to a decline in the consumption of mass-produced beers such as InBev's premium pilsner brands such as Budweiser.

The premiumization of beer is likely to continue in the coming years. Consumers are increasingly interested in trying new and different beers, and they are willing to pay more for quality. Brewers are responding to this trend by investing in new products and marketing campaigns that target premium beer drinkers. InBev's management still sees opportunities in premiumization, especially for emerging & developing markets.

Superior margins

Anheuser-Busch InBev has a strong track record of operational excellence and is notorious for rigorous cost-controlling with a clear focus on margin expansion. As a result, EBITDA-margins are still the highest in the sector when comparing with direct competitors:

On the other hand, InBev is suffering to keep up with inflation of commodity prices. While commodity prices have been somewhat stable during the previous decade, price inflation has returned since the corona pandemic.

InBev was able to partly offset pressure on margins by keeping overhead expenses under control while increasing operational efficiencies. Overhead expenses declined by 1% in the period 2019-2022. While the volume per FTE went up with 9% over the same period. Today's inflationary environment presents a challenge for the company. On the one hand it can increase prices by focusing on premiumization. On the other hand, its cost structure is heavily dependent on grain & energy prices. Consumers can handle some level of price increase but also turn their backs when prices rise too aggressively. This is typical for all consumer staples. In conclusion, InBev deserves a premium for having the highest margins of the sector. My expectation is that margins will slightly recover over the coming year as inflation is declining to more normal levels while energy prices are declining year over year. If the company is able to increase revenues per hectoliter faster than inflation, gross margins can stay at high levels.

When looking at the evolution of profits we can see that EBITDA has been fairly flat since 2016. The company expects EBITDA to grow between 4-8% annually.

A cash machine

Anheuser-Busch InBev has a strong track record of generating operational free cash flows, which is a measure of a company's ability to convert its earnings into cash. Free cash flows over the last 4 years averaged $ 8.5 billion. Compare that with the current market capitalization of $ 126 billion and you can conclude the company is trading at around 14.5x operational free cash flow.

In conclusion, InBev is well focused on profitability and cash generation. Compared to its competitors: Heineken (HEINY) (HINKF) , Molson Coors (TAP) & Carlsberg (CABGY) , it scores the highest on profitability and cash generating abilities.

Bud Light Affair

Now for the elephant in the room. In early 2023, Anheuser-Busch InBev faced a boycott from some conservative commentators and celebrities over its collaboration with transgender influencer Dylan Mulvaney. The boycott led to a significant drop in Bud Light sales in the United States, with off-premise sales dropping by 26% in the month of May 2023 .

The boycott also had a negative impact on AB InBev's overall financial performance. In the second quarter of 2023, the company reported a 5.2% decline in market share in the US. Unfortunately, the boycott appears to have had a long term impact on Bud Light's sales. By the end of Q3 2023, market share in the US has not recovered significantly since the initial drop.

The full impact of the boycott was also visible in financial results. In North American revenues declines by 12.7% and EBITDA dropped by 26.7% offsetting the outstanding performance in other markets. Coincidence or not, InBev promoted Michelob Ultra as its forth premium brand on its investors day indicating it rather puts future marketing investments in a brand that has not been 'stained' by the boycott.

Personally, I do not understand that a company of such size and which such a track record in building brands, can make a mistake of this level. Bud Light was seen as an 'old' American icon and was heavily promoted on super bowls. Even without having a university degree in marketing, the company should know that consumers associate themselves with the brands they buy. When guests come to your home and you serve them one of your cold beers, you are associated with the brands you are serving and their image and status. In this case it was apparent that Bud Light's consumer base is mostly conservative and does not like to be associated with transgenders. Yet InBev somehow completely missed this. This blunder is the equivalent of McDonald's actively promoting veganism.

Latest Q3 results

In the third quarter, overall sales increased by 5% mainly due to price increases. Top global brands Budweiser, Stella Artois, Corona and Michelob Ultra performed well outside their home markets. On the other hand, volumes declined by 3.4% which was more than expected. This is mainly due to the important North American market. There, volumes fell by 17.1% on an annual basis, even steeper than the 14.1% decline in the previous quarter. The controversy surrounding Bud Light (discussed above), which was an unexpected tailwind for competitor Modelo, cuts even deeper than expected. AB InBev will cut about 2% of American jobs. Europe also performed somewhat less well, but the other markets generally did well. Underlying earnings per share increased 2.4%. Normalized EBITDA rose 4.1%, slightly better than expected. Yet the annual target of 4 to 8% EBITDA growth was not increased, even though it was probably strong. The group will also buy back its own shares (up to 1 billion USD). Additionally, it will buy back $ 3 billion in bonds through a tender.

Valuation and conclusion

As an investment case InBev is a mixed bag. On the one hand, the underlying business is solid, driven by strong brands, global presence, operational efficiency, high margins, and large cash flows. On the other hand, volume growth has been very moderate. Therefore, InBev's future revenue growth is quite dependent on increasing revenues per hectoliter. The company sees the biggest opportunity for premiumization in developing countries (Mexico, Brazil, Nigeria, India, …), while in developed countries revenues will be rather flat.

Based on estimated valuation multiples, I cannot conclude that AB-InBev is particularly cheap neither. On both current and forward P/E multiple the company is valued at a premium compared with direct competitors Heineken & Carlsberg. The stock is also trading close to historical P/E ratio of 21.1x (average last 4 years). The cash flow generation is appealing with a free cash flow yield of around ~7% at current price. However, InBev prioritizes capital allocation toward debt redemption while the company is still carrying a large debt of approximately 3.5x Net Debt/EBITDA (still far away from the targeted 2.0x). This is reflected in the dividend yield which currently stands at 2.0 % which is unappealing for a company with mediocre growth.

Source S&P Global Market Intelligence (Marketscreener.com)

In conclusion, the company is fairly valued. Their single digit growth story is uninspiring. Additionally, it seems the company has lost its golden halo. Since the dramatic acquisition of SabMiller in 2016 the company never succeeded in casting away doubts. The recent Bud Light affair casts another shadow over its business. Based on this I give a HOLD rating to the company.

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