2023-08-04 14:30:37 ET
Summary
- Anheuser-Busch InBev SA/NV financial results for Q2 2023 exceeded profit expectations, despite falling short on revenue.
- The company's growth outlook for this year remains positive, despite controversy and allegations of being "woke."
- Market share has stabilized and shares look attractive at this time.
To many investors and market watchers, August 3rd might have been a surprising day. Before the market opened, the management team at beer giant Anheuser-Busch InBev SA/NV ( BUD ) announced financial results covering the second quarter of the company's 2023 fiscal year. Although management failed to match expectations set by analysts when it came to revenue, profits exceeded forecasts . More importantly, the company continues to guide toward growth for this year relative to last year. The reason why I say that this is likely surprising is because so many in the investment community have railed against the business.
Much of the consternation has centered around allegations that the business has gone "woke" because of what can only be described as the "Dylan Mulvaney incident." To me, nothing that I saw in the quarterly results for the company was a surprise. In fact, this earnings release only confirms the view that I espoused in a prior article that all of the furor surrounding the company is nothing but a giant nothingburger. With this confirmation now solidified and a solid understanding of how cheap shares currently are, I feel very comfortable keeping the business rated a "buy" at this time.
Diving into results
As noted above, back in the middle of April I wrote a bullish article discussing Anheuser-Busch InBev and all of the controversy surrounding the company leading up to that point. In that article, I discussed how the company found itself in the middle of a political maelstrom due to allegations that the company had gone "woke."
Truthfully, the topic has been written about so much, that I don't feel it would add anything to rehash the details. But what we do know is that many believed at the time that the company would suffer significantly from a financial perspective because of its actions. I maintained in that article the view that boycotts such as the one that Anheuser-Busch InBev faced rarely have a significant and prolonged impact on any company. And as a multinational business that generates a large chunk of its revenue and profits from outside of the U.S. market and that has a vast portfolio of assets outside of what is now its controversial Bud Light, I felt this to be especially true in this case.
Fast forward to today, and my view has been confirmed. This is not to say that the company did not see any impact. Because the fact of the matter is that it did. During the second quarter of the 2023 fiscal year, revenue for the company came in at $15.12 billion. This actually represents a 2.2% increase over the $14.79 billion sales that the company reported one year earlier. This is not the increase on a percentage basis that most news sources have picked up on. The actual number provided elsewhere is an increase of 7.2%. But that number is actually the organic revenue growth that ignores acquisitions, divestitures, and foreign currency fluctuations.
Even so, revenue did fall short of what analysts forecasted by $260 million.
The increase in revenue for the company was driven largely by higher prices that it charged for its products, with average revenue per hectoliter growing 9% year-over-year. One thing that those who are bearish about the company might point out is the fact that the overall volume of product shipped by the company declined by 1.4% year-over-year, from 149.73 million hectoliters to 147.58 million hectoliters. While this is the case and it is unfortunate for those who are bullish on the company, it should not be a surprise. The fact of the matter is that, for years, the company has seen the volume that it produces decline on a year-over-year basis. From 2021 to 2022, for instance, volumes dropped by 3.7%.
Even though revenue for the company managed to increase, not every region in which it operates was the same. Organic revenue throughout North America, driven entirely by the U.S. market, dropped by 9% year over year. Overall volumes impacted sales negatively in the U.S. by 10.5%.
It is worth noting that, according to management, the company's U.S. market share has stabilized since late April of this year at just over 36%. So we are not seeing substantial declines worsen at this time. All other major regions in which the company operates showed fantastic growth. Organic revenue in what management calls the Middle Americas shot up 10.2%. But this was actually the slowest growing region for the company. Organic revenue in the EMEA (Europe, Middle East, and Africa) markets jumped 12%. In the Asia Pacific region, growth was 14.5%. And most impressive was the 23.8% jump in organic revenue that the company reported in South America. All of this aligns with my prior argument that the rest of the world does not care about the alleged "woke agenda" that the company purportedly advocated.
On the bottom line, the picture was a bit different. Earnings per share for the company came in at only $0.17. That was down from the $0.79 per share that the company reported one year earlier. This translated to a massive decline from nearly $1.60 billion in profits to only $339 million. However, the single largest contributor to this drop was a $1.08 billion decline associated with mark to market adjustments for certain derivative instruments that the company entered into in order to hedge its share-based payment programs, as well as for shares issued in relation to some M&A activities. On an adjusted basis, net profits dipped only slightly from $1.47 billion to $1.45 billion. This resulted in adjusted earnings per share falling from $0.73 to $0.72. But the good news for shareholders is that this resulted in management exceeding analysts’ forecasts by $0.03 per share.
Generally speaking, there are other profitability metrics that I like to look into. One of these is operating cash flow. However, management did not report this figure for the second quarter on its own. All we have for this is a reading for the first half of the year as a whole. Year over year, this number dropped from $5.96 billion to $5.36 billion. Now, if you look at the company's actual financial statements, you'll come up with a different reading than this. I made adjustments to it to make it compatible with GAAP as opposed to IFRS. If we adjust for changes in working capital, the metric actually increased from $9.49 billion to $10.17 billion in the first half of the year. Going back to the quarterly data, we did see a slight decline in EBITDA from $5.10 billion to $4.91 billion. And all of that came from weakness in the North American market. In all other major markets, EBITDA skyrocketed.
Other important observations
Before I get into valuing the company, I would like to provide some observations regarding some interesting aspects of the company. For starters, the company's three big global brands experienced fantastic growth year-over-year. Outside of Mexico, revenue growth for Corona Extra totaled 23.7%. Outside of Belgium, revenue growth for Stella Artois came in at 14.5%. And outside of the U.S., revenue growth for Budweiser was 16.9%. All of this is great to see, but outside of just simple beer sales, the company also had some interesting data points to share.
One example can be seen by looking at the company’s BEES platform. As of June of this year, the digital platform boasted 3.3 million monthly active users. That's up 15% compared to the 2.9 million reported the same time last year. They also boasted digital retention exceeding 98%. This robust showing allowed the company to achieve gross merchandise value on the platform of $9.2 billion during the quarter. That's up from the $7.4 billion reported at the same time last year. Overall gross merchandise value for its marketplace went from $265 million to $340 million. That's a 41% increase year-over-year.
This is not the only digital initiative the company has. Its entire digital direct to consumer product line generated over $115 million in revenue during the second quarter, all stemming from 16.5 million online orders from 9.8 million active consumers. Ze Delivery’s rewards program that launched in April of this year reported 1.6 million rewards members in its first 45 days of operation. And TaDa Delivery experienced around 2 million orders during the second quarter of the year, which translates to a 116% increase year-over-year.
Shares look cheap
On the valuation side, the picture for the company also looks positive. For this year as a whole, management is forecasting EBITDA growth of between 4% and 8% compared to what it was last year. Revenue growth should be even higher than what EBITDA is forecasted to be. At the midpoint, this translates to $21.03 billion. However, management has not given a realistic range for that. If we assume that other profitability metrics will grow at the same rate that EBITDA is forecast at 2 at the midpoint, we would expect net income of $6.33 billion and adjusted operating cash flow of $21.14 billion.
Using these figures, I was able to create the chart above. It shows how the company is priced using forward estimates for this year and using historical results from 2022. Even if we use the more conservative figures from last year, the stock looks attractively priced. This is true both on an absolute basis and relative to similar firms. To see what I mean, we need only look at the table below where I compared the enterprise to five similar firms. On a price to earnings basis, only one of the companies ended up being cheaper than Anheuser-Busch InBev. But when it comes to the other two profitability metrics, our prospect ended up being the cheapest of the group.
Company | Price / Earnings | Price / Operating Cash Flow | EV / EBITDA |
Anheuser-Busch InBev | 18.6 | 5.6 | 9.9 |
Heineken NV ( HEINY ) | 20.8 | 16.1 | 12.2 |
Ambev SA ( ABEV ) | 16.2 | 12.3 | 11.0 |
Carlsberg A/S ( CABGY ) | N/A | N/A | 11.3 |
Molson Coors Beverage Co ( TAP ) | 22.6 | 8.7 | 27.2 |
Boston Beer Co ( SAM ) | 67.6 | 24.5 | 20.6 |
Takeaway
I think it's time for the bears to accept the fact that boycotts rarely have a significant impact on a company. Yes, sales were damaged in the U.S. But this didn't change the fact that the company reported revenue growth year-over-year and adjusted profits that were almost flat compared to the same time last year. This doesn’t come close to making the "go woke, go broke" mantra true. If anything, a more appropriate mantra would be "go woke, see almost no meaningful financial consequences."
It is important for me to note here that I am not taking this from a political perspective. I have views that align with both sides of the American political aisle. I have also supported politicians on both sides. Truth be told, I have been skeptical of boycotts for several years now. When liberals lambasted Chick-fil-A several years ago for its stance on LGBTQ issues, I was also skeptical of any real impact on the business. In fact, I would wager that Chick-fil-A is probably doing better today than it ever has. God knows that its lines are just as long.
The reason why boycotts rarely succeed is twofold. First, any small number of customers is insignificant for such a large business. And they are only depriving themselves of something that they previously enjoyed, effectively hurting themselves more than they are hurting the company that is getting its revenue from all other sources. Eventually, many who started boycotting give in and/or the company grows its customer base elsewhere.
This ties in with my second reason, which is that the customer base for almost any company is rarely homogenized from a cultural perspective. Conservatives drink Anheuser-Busch InBev products. Liberals drink it. People who are apolitical drink it. People of almost any profession, social class, race, religion, et cetera, drink it. Unless a company has a customer base that is extremely homogeneous, mass boycotts are just an annoyance for the company in question.
Lastly, I would like to touch on one other thing. It is my belief that Anheuser-Busch InBev handled the entire boycott situation poorly. I actually believe that sales would have been higher had the company not apologized and not backtracked on the Dylan Mulvaney scandal. Even though the company intended to calm down a contingent of its customer base by backtracking, it underestimated the zeal with which those customers were expressing their frustration. So it likely received no significant benefit from that decision. Simultaneously, the decision to backtrack alienated a chunk of the company’s customer base on the left side of the political spectrum. So now, it had to deal with boycotts from both sides of the aisle.
At the end of the day, we know that what many predicted would be a waterfall turned out to be only a trickle. But it was a risk that management should not have taken. As for the company moving forward, shares look incredibly attractive at this moment in time and, with future growth on the horizon, I definitely feel comfortable rating Anheuser-Busch InBev SA/NV a "buy" at this time.
For further details see:
Anheuser-Busch InBev Drinks The 'Go Woke, Go Broke' Mob Under The Table