BUDFF - Anheuser-Busch: The End To Its Punishment Could Be Near (Rating Upgrade)

2023-06-14 08:00:00 ET

Summary

• AB InBev's investors were hammered in May, even though the company posted a pretty robust Q1 earnings release.
• Recent industry data suggests that the company could face a further fallout as it loses market share to its arch-rivals.
• However, BUD's valuation has fallen into highly attractive zones, which could attract long-term investors to return to the fray.
• I also gleaned that dip-buying sentiments have improved, opening up a fantastic opportunity for high-conviction investors to add more exposure.

In my previous article, I updated investors in Anheuser-Busch InBev SA/NV or AB InBev ( BUD ) not to panic, as investors feared the reprisals from the fallout of the Dylan Mulvaney controversy. Despite that, I also reminded investors there isn't an attractive buy level then, as earlier dip buyers from BUD's "October lows could be motivated to cut exposure, taking some risks off the table from the recent controversy."

As such, BUD "diamond hands" looking to capitalize on the negative sentiments should be patient in waiting for a "deeper pullback to more constructive support levels before adding exposure."

That steep pullback has arrived, as BUD fell more than 20% from its April highs toward its late May lows. It was a stunning decline in just over a month, even as AB InBev reported a decent Q1 earnings release in early May. Keen investors should recall that the company delivered a pretty solid 13.2% YoY organic revenue increase, " almost entirely driven by price/mix." Therefore, I assessed that the company demonstrated its market leadership, as it also telegraphed a constructive medium-term EBITDA growth " outlook of between 4-8%."

Despite that, market operators used the opportunity to take profit/cut exposure as they rotated out of the beleaguered brewer. I believe the chance to cut exposure was justified, as BUD re-tested its January 2022 highs, which previously proved to be a critical resistance zone for sellers.

Sellers would point out that industry data in late May vindicated their actions, as AB InBev showed signs of losing market share to its arch-rivals. Notably, " Bud Light sales declined by 24.6% in the week ended May 13." At the same time, "Coors Light volumes experienced a significant jump of 16.9%," suggesting that Molson Coors ( TAP ) benefited from AB InBev's self-inflicted wounds.

However, I believe it's critical for investors to note that dip buyers returned at the end of May, helping to defend against a further steep decline in BUD. As such, I assessed that unless things get much worse for AB InBev, the negative sentiments have likely been reflected, as BUD's valuation improved markedly from my previous update.

Investors must also note that AB InBev is a wide-moat company and has proved its robust profitability over the years. It delivered an adjusted EBITDA margin of 33.5% in Q1. However, analysts likely penciled in a near-term impact on its operating performance for Q2, as they expect the company to post an adjusted EBITDA margin of 31.9%.

Notwithstanding, it's not expected to be structural, with the company projected to deliver an adjusted EBITDA margin of 33.5% for the full year. While AB InBev's brand positioning has undoubtedly been hit in the near term, its scale and cost advantage moat remains highly formidable. Furthermore, BUD's valuation is mainly anchored by its ex-US segment. A sum-of-the-parts or SOTP valuation indicates North America accounts for about 26% of BUD's valuation.

Moreover, the company's "emerging markets are mostly premiumizing." In its recent earnings release, management also alluded to its beneficial pricing actions, stressing that "ongoing premiumization and revenue management initiatives contributed to revenue growth."

Therefore, I believe high-conviction investors can likely fall back on AB InBev's strong moat and profitability drivers to fend off the near-term impact of its failed marketing campaign. Furthermore, the steep decline over the past month proffers these investors another opportunity to add more exposure.

But is BUD's valuation constructive at the current levels? Also, how strong are the buying sentiments currently, and whether we have robust support zones to help stem a further decline?

As seen above, dip buyers returned over the past three weeks, looking for an opportunity to buy the steep decline.

However, there isn't a well-established support zone that could provide more confidence for long-term buyers to return, which remains the most critical risk of adding at the current levels.

I also assessed that BUD's buyers need help from momentum investors to lift BUD's recovery back above the 50-week moving average or MA (blue line) for a more sustainable recovery.

Despite that, BUD's forward EBITDA multiple of 8.9x is at the two-standard deviation zone under its 10Y average of 12.1x, suggesting it's highly attractive. Therefore, I gleaned that BUD's constructive valuation could attract more long-term buyers to return if it could hold the current levels as a robust consolidation zone.

With that in mind, I'm ready to lift my rating on BUD.

Rating: Buy (Revised from Hold).

Important note: Investors are reminded to do their own due diligence and not rely on the information provided as financial advice. The rating is also not intended to time a specific entry/exit at the point of writing unless otherwise specified.

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