BUD - The Concerning Signs Of Anheuser-Busch

2023-08-23 12:57:04 ET

Summary

• Anheuser-Busch InBev's North American business faced controversy and boycotts after a TikTok promotion of Bud Light, leading to a drop in global volumes.
• Activists boycotted and protested against AB InBev, demanding change in its policies.
• I think BUD is unlikely to recover quickly from the boycotts, even though Q2 FY2023 showed growth in total sales.
• BUD's market share keeps declining rapidly, the most recent Nielsen data shows.

If you read this article you probably know without me what's been going on with Anheuser-Busch InBev's ( BUD ) North-American business branch this year. In case you don't know, the firm faced controversy after partnering with transgender influencer Dylan Mulvaney for a TikTok promotion of Bud Light. Backlash and boycott calls from conservatives ensued, causing a drop in global Bud Light volumes. Management responded by having executives take leave, shifting marketing focus to sports and music, and clarifying the promotion's non-official status. The partnership ignited culture wars, with LGBTQ+ groups demanding change. Bud Light sales plunged, leading to a heavy stock price correction. The stock now is still ~6% down YTD:

Activists boycotted, protested, and influenced businesses against AB InBev. The company affirmed its commitment to diversity but faces an ongoing challenge to its policies.

The investor community is still trying to figure out how quickly the company can recover from the boycotts, if at all. Today I see a number of clear signs that BUD stock is unlikely behind its worst days. Let me elaborate on that view.

With North America contributing only 26% of BUD's consolidated EBITDA, the 24.4% decline in this region in the second quarter of FY2023 wasn't as dramatic as many expected. In general, Q2 FY2023 saw growth in both total sales and sales per hectoliter and even total EBITDA:

The boycott in the U.S. resulted in a 10.5% year-over-year decline in sales in this region, primarily due to lower buying activity (volume was down 14.1% YoY). In its IR materials, BUD stated that its market share remained stable in the second quarter despite all the difficulties:

In my opinion, however, the picture from the above IR materials reflects too small a time span to paint a complete picture of developments in the U.S. beer market. On August 22, Citi Research published a report on this market (proprietary source, based on Nielsen data ), in which we see the dynamics of the market share of BUD since 2019:

As you can see, BUD's market share has actually been in a relatively severe fall since May 2023 - and this fall is not stopping. In the latest 4 weeks, AB InBev's beer volumes dropped by 15.2%, a more significant decline than the market's 2.8%. Although beer price/mix increased by 4.1%, the total dollar sales in beer decreased by 11.7%, similar to last month's 12.2% decline. AB InBev's total value share fell by 484 basis points, and beer value share dropped by 555 basis points due to the ongoing Bud Light controversy, Nielsen reported. Bud Light makes up about 30% of the company's US revenues (around 8% of the group). Both Bud Light and Budweiser volumes saw declines of 29.7% and 25.3% respectively, compared to the previous four-week period's drops of 29.9% and 26.2%.

BUD is also struggling to compete in the fast-growing hard seltzer segment of the U.S. beverage market against specialty hard seltzer brands such as White Claw and Truly, which have established themselves as dominant players.

The company is to be commended for digitizing its business processes. BUD has developed and expanded e-commerce platforms that allow customers to order their products online. These include initiatives such as Zé Delivery, which enables customers to order beer for delivery in Brazil, and PerfectDraft, a DTC product available in several markets for enjoying a draft beer at home.

BEES (Budweiser E-commerce Ecosystem System) marketplace, which offers a platform for consumers to purchase not only their own products but also third-party items, is expanding rapidly:

The company's debt maturity profile seems well-distributed, with $3 billion worth of bonds maturing through FY2025. BUD maintains solid liquidity of ~$16.9 billion, comprising credit facilities and cash equivalents. Deleveraging is the key for BUD, as was stated during the latest earnings call . So I have no doubts about the relative stability of the business in terms of its creditworthiness.

What puzzles me is the enormous FCF reduction the firm experienced recently. While the market share of its key products continues to decline in very important regional markets, management continues to pursue its chosen path of digitization, which brings with it more and more CapEx. Add to that the working capital issues and you'll get BUD's FCF yield falling from a stable 3.5% to below 1% last quarter:

The CEO Fernando Tennenbaum addressed a question [during the earnings call] regarding working capital and cash flow. He mentioned that the adverse effect on FCF in 1H 2023 was partly due to higher derivative receivables positions, volume growth, and channel mix changes. On the payable side, he highlighted that during the pandemic, higher inventories were held to ensure supply chain stability, leading to increased payables. As inventories normalize, payables are expected to revert back, contributing to a more balanced cash flow going forward. We'll see how it will actually play out in the next few quarters, but I don't expect much on that front.

If we recall the Nielsen data above, it is striking that the management did not reduce its guidance for FY2023, expecting strong performance in 2H. As a result, I think the market has expected too much from BUD if we look at Wall Street's forecasts. Analysts are drawing strong earnings per share growth with a CAGR of 11.52% for the next 5 years:

All in all, if BUD can meet the Street's expectations, the stock should go up a lot because of the discount currently embedded in its valuation. Historically, BUD has been at the low end of its normal EV/EBITDA range, which makes BUD a very attractive investment [amid its deleveraging] if EPS CAGR can reach double digits in the next few years.

But as I wrote above, I have doubts that this projected EPS growth is feasible. The unabated boycotts are bearing fruit, as we can see, and most likely BUD will need more time to make up for the realized reputational risk.

At the same time, one must also understand that the resulting discount is not only due to the boycott of products and the resulting decline in EBITDA but also due to the boycott of the stock itself. Many investors want nothing more to do with BUD, including their investment decisions. Therefore, I expect that the current discount in BUD stock may persist much longer than many dip buyers expect.

Concluding Thoughts

Boycotting always arouses public interest and many questions about how soon the company will stop bleeding. Only time can tell us how soon. In my opinion, there is no reason to try to bottom out in the BUD story - as long as its market share continues to decline, one should stay on the sidelines, regardless of how positive BUD's management looks at the near future and how much growth Wall Street predicts. BUD gets a Neutral/Hold rating from me this time.

Thanks for reading!

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