CABGY - Carlsberg: Fairly Valued Beer Giant
2023-11-27 13:22:42 ET
Summary
- Carlsberg's ADRs look cheap at less than 4x Fwd P/E, but this is due to an incorrect ADR/share conversion ratio.
- The company is actually trading at 17.5x Fwd P/E, in line with its beverage peers.
- While Carlsberg is a well-run company with consistent profitability, there is no compelling reason to buy its shares at this time.
While screening for stocks with cheap valuations, I came across the brewing giant, Carlsberg A/S (CABGY). According to Seeking Alpha and other financial services like Tikr, Carlsberg's ADRs are trading phenomenally cheap at less than 4x P/E.
However, upon further investigation, CABGY's cheap valuation is due to an incorrect conversion ratio on the ADRs. The company is trading at 17.5x Fwd P/E which is in line with its beverage peers.
While I like Carlsberg's consistent profitability and market-leading brands, I do not see a compelling reason to buy its shares at this time. I will revisit Carlsberg if there is any significant pullback in the share price.
(Author's note, financial figures in this article are quoted in Danish Krone unless otherwise stated)
Company Overview
Carlsberg A/S is one of the largest brewing groups in the world with a portfolio of world-leading brands with 21 markets where Carlsberg is either #1 or #2 in terms of market share (Figure 1).
Figure 1 - Carlsberg geographical exposure (Company investor presentation)
Carlsberg's revenues are split with 50% derived from Western Europe, 34% from Asia, and 16% from Central & Eastern Europe. Business mix by volume is 35%/39%/26% respectively.
The company's focus is primarily on the 'mainstream core' segment, which accounts for 62% of volumes (Figure 2). In contrast, premium beers account for only 16% of volumes.
Figure 2 - Carlsberg's focus is on mainstream core brands (Company investor presentation)
Carlsberg Is A Well-Run Machine...
Financially, Carlsberg is a well-run machine, as the company has been consistently profitable, even through the COVID-pandemic. In the most recent fiscal year 2022, Carlsberg delivered DKK70.3 billion in revenues and DKK 11.5 billion in operating profits or a 16.4% operating margin (Figure 3).
Figure 3 - Carlsberg has been consistently profitable (Company investor presentation)
...With Strong Capital Returns...
Investors have been well rewarded financially, as Carlsberg has returned massive amounts of capital in the past few years through dividends and share buybacks. In 2022, Carlsberg paid a DKK27/share dividend, which amounted to DKK3.4 billion, plus it bought back DKK4.4 billion in shares (Figure 4).
Figure 4 - Carlsberg has been returning excess cash to investors via dividends and buybacks (Company investor presentation)
...But Shares At Multi-year Lows
However, despite strong capital returns, Carlsberg's share price has languished, recently trading at multi-year lows of ~$25/ADR (Figure 5).
Figure 5 - CABGY shares are at multi-year lows (Stockcharts.com)
What are investors fearful of and could this be a buying opportunity for Carlsberg shares?
Trading Volumes For Price
I believe the bear case for Carlsberg, and many consumer staples companies in recent quarters is that they have been taking price increases at the expense of volumes. For example, in the latest reported third quarter, Carlsberg saw revenues increase 5.8% YoY, however, that was mostly from a 9.0% YoY increase in price and mix, while volumes declined 3.0% YoY (Figure 6).
Figure 6 - Carlsberg has been trading volumes for price (Company investor presentation)
The issue is especially pronounced in Carlsberg's core markets of Western Europe where consumers guzzled 5.2% less of Carlsberg's beers while paying 13% higher prices to do so (Figure 7).
Figure 7 - Problem is especially pronounced in core Western Europe markets (Company investor presentation)
Although taking the price to offset inflation can keep revenues growing, it is not a viable long-term strategy as lost consumption may never return as struggling consumers switch to budget brands or pull back from alcohol consumption altogether.
Central and Eastern Europe saw an even steeper 6.3% drop in volumes as Carlsberg took 14% price increases (Figure 8).
Figure 8 - Volume declines in Central Europe was even more alarming (Company investor presentation)
Valuation Is Misleading
What initially caught my eye on Carlsberg was the company's incredibly cheap valuation, with Seeking Alpha showing the company is being valued at just 3.8x Fwd P/E (Figure 9).
Figure 9 - Carlsberg valuation, Seeking Alpha (Seeking Alpha)
However, upon further investigation, I believe most financial data services like Seeking Alpha and tikr.com (Figure 10) may be showing incorrect information on Carlsberg's American Depository Receipts ("ADRs").
If we look at Carlsberg's financials in Danish Krone, the company recorded DKK72.6 billion in LTM revenues and DKK55 / share in dil. EPS (Figure 11).
Since the DKK/USD exchange rate is approximately 6.8:1, that means Carlsberg generated $10.6 billion in revenues and ~$8 / share in dil. EPS.
However, investors need to recognize that each common share is equal to 5 ADRs (Figure 12).
Figure 12 - Each ordinary share is equal to 5 ADRs (carlsberggroup.com)
Hence, on a per ADR basis, earnings are more like ~$1.60, and CABGY's valuation is more like 19x forward P/E and not the 3.8x shown by Seeking Alpha.
GAAP earnings include a charge for the appropriation of the Carlsberg's Russian business (Figure 13). On a normalized basis, forward P/E should be closer to 17.5x.
Figure 13 - GAAP earnings include a charge for Russia (Company investor presentation)
Relative to other large beverage conglomerates like Anheuser-Busch and Heineken with a median forward P/E multiple of 18.1x, Carlsberg's valuation is fair (Figure 14).
Carlsberg also sports a 3.2% dividend yield, which is in line with the Consumer Staples sector.
Technicals Primed For A Rebound, But What's The Catalyst?
Technically, CABGY's stock price has fallen to multi-year support levels around $23 / share and appears to be rebounding. Current risk/reward is favourable with a potential target to the top of the range in the $30s (Figure 15).
Figure 15 - CABGY bouncing off multi-year support (Author created with price chart from stockcharts.com)
However, with the shares fairly priced, I am not sure what the catalyst will be to drive the shares higher.
Risks To Carlsberg
The biggest risk to Carlsberg is if volume declines accelerate and the company is unable to offset volumes with price increases, then we could see decreasing profitability for the brewer. However, so far, the company has been managing the challenging macro environment well and for the most part, price increases have been absorbed by consumers.
Conclusion
Carlsberg's shares look phenomenally cheap at 3.8x Fwd P/E according to Seeking Alpha and 3.5x according to tikr.com. However, I believe that is due to a share conversion issue, and the true forward multiple is closer to 17.5x on a normalized basis. This is in line with other large beverage conglomerates.
While Carlsberg's shares appear to be bouncing off of multi-year support levels, it is unclear what fundamental developments will drive the shares higher in the short term. I am initiating coverage with a hold rating and will revisit the shares upon any significant pullbacks.
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Carlsberg: Fairly Valued Beer Giant