BUD - Anheuser-Busch: The Go Woke Meltdown Is Fizzling Out - Stay On

2023-08-18 08:30:00 ET

Summary

• AB InBev investors who didn't flee from the recent controversy have done well. The selling pressure has dissipated as buyers have continued to defend BUD's May 2023 lows.
• The company's second quarter earnings demonstrated why the fallout is expected to be limited. Therefore, it's crucial for investors not to overreact to overly bearish notions.
• AB InBev's operating performance could bottom out in FY23 before its earnings could return to robust growth from FY24.
• High-conviction investors anticipating further upside shouldn't wait till the coast is clear before buying more shares.
• I make the case why investors should capitalize on its battering at the current levels and not fall prey to pessimistic themes.

I turned bullish on Anheuser-Busch InBev SA/NV or AB InBev (BUD) stock in June 2023, urging investors to capitalize on more constructive buying sentiments since its remarkable collapse.

Keen investors should recall the first-half controversy involving Bud Light's marketing campaign with transgender influencer Dylan Mulvaney. However, the selling pressure on wide-moat AB InBev has abated significantly since then, suggesting buyers could be accumulating.

I have yet to discern substantial buying momentum as BUD consolidates over the past three months. However, the lack of selling intensity is constructive for dip buyers looking to continue adding exposure. Since my June update, BUD's performance has been broadly in line with the S&P 500 ( SPX ) ( SPY ).

AB InBev's second-quarter or FQ2 earnings release corroborates my confidence in the limited fallout against its well-diversified geographical base. While the company saw a substantial reduction in volumes in North America by 14.1%, strong pricing action helped to mitigate the decline. However, it is still affected its adjusted EBITDA, suggesting that volume-driven scale efficiencies are fundamental to AB InBev's profitability. Notwithstanding the near-term impact, management's commentary indicates that the effect is likely transitory, as the company maintained confidence in its full-year guidance.

Moreover, the growth in the ex-US regions was robust in Q2, suggesting that investors were unduly concerned about sustained profitability hits to AB InBev's overall performance. The revised analysts' estimates corroborate my conviction that the company's normalized net income decline could bottom out in FY23 before a sharp infection to growth from FY24.

In addition, the company expects more robust tailwinds from the ongoing normalization in commodity pricing trends and inventory adjustment, helping to improve its free cash flow or FCF generation. As such, the market has likely anticipated peak pessimism in BUD, with the potential for substantial operating leverage gains moving ahead.

Accordingly, AB InBev is projected to register an adjusted net income CAGR of 9% from FY22-25, despite this year's 5.5% decline. Seeking Alpha Quant's "B" growth grade should underpin investors' confidence that we should have seen the worst unless its operating performance takes a significant downswing.

With BUD still hovering relatively close to its May 2023 lows of $53, do its recent buying sentiments suggest an attractive risk/reward entry point at the current levels?

BUD survived the meltdown from its April 2023 highs but remained above its October 2022 battering and May 2023 lows. As such, buyers have resolutely defended the current levels, even though a lack of more robust buying momentum is a concern.

I gleaned that BUD needs to regain control of its 50-week moving average (blue line) to attract momentum buyers to return, anticipating further upside. As such, dip buyers with the conviction that the current levels point to an accumulation zone should capitalize earlier before the rest return.

Notwithstanding my optimism, buyers should carefully monitor BUD's May lows as a critical support zone that must be held robustly, given its long-term downtrend. The failure at its April 2023 highs aligned with its critical resistance zone in January 2022 suggests a lack of confidence in reversing its long-term downtrend.

In other words, if BUD buyers fail to hold their May lows decisively, cutting exposure fully or partially should be considered a risk management action, anticipating more significant downside volatility.

Rating: Maintain Buy. Please note that a Buy rating is equivalent to a Bullish or Market Outperform rating.

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

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