2023-04-16 05:51:33 ET
Summary
- AB InBev's recent partnership with transgender influencer Dylan Mulvaney has sparked controversy and generated significant buzz.
- However, investors have surprisingly remained calm and refrained from a mass sell-off in BUD, signaling a strong vote of confidence in the company's ability to weather the fallout.
- With BUD trading at levels below its historical averages, the potential for buyers to swoop in and defend against panic selling is a distinct possibility.
- AB InBev is a wide-moat company with well-diversified global operations. Investors should avoid selling in a panic unless it's expected to affect its ex-US market share significantly.
Anheuser-Busch InBev SA/NV, or AB InBev (BUD), is a leading globally diversified brewer hit by the recent controversy over Bud Light's partnership with transgender influencer Dylan Mulvaney .
The backlash was addressed by CEO Brendan Whitworth recently, as he highlighted: " We never intended to be part of a discussion that divides people."
However, that wasn't able to stem the fallout from the divide it spurred. Moreover, management might have understated the furor that erupted through its partnership intended to force a closer relationship with Gen Z drinkers.
As such, the miscalculated move has also drawn the ire of the financial media, highlighting that the company's response left Mulvaney fending for herself. In addition, Bloomberg argued that Whitworth's commentary did not address "the anti-trans backlash that has ensued," leaving investors guessing the company's position in its marketing campaign.
Therefore, it does bring into the spotlight whether the company's marketing team has done its due diligence accordingly to handle the potential backlash from the public.
As such, management's "lack of response" could "further contribute to a hostile landscape for transgender people" and not bring the wider community closer together, as intended by management. In addition, the PR disaster could also compel more conservative segments of its drinkers to shun its brands, even as the company is trying to engineer a long-term gross margin recovery.
As such, AB InBev needs to be much more cautious in its partnership moving forward, as the financial media aptly pointed out management's " lack of corporate courage in the face of criticism." Of course, no one forced AB InBev to work with Mulvaney. However, it highlights why companies must be highly critical and deliberate about their marketing campaigns when taking on politicized and highly controversial issues.
Still, investors will need to ask whether the recent pullback in BUD is enough to justify adding more shares?
It's important to consider that the issue could be limited to the US market in the near term and not likely to impact its global sales cadence.
Moreover, AB InBev is a wide moat company with well-diversified global operations that exceeded its pre-COVID volume by hectoliters in 2021.
Furthermore, it grew its volume by 2.4% YoY in 2022, while its top line increased by 6.4% YoY. However, the pandemic-driven growth slowed significantly compared to FY21's 15.8% top line surge.
However, its North America or NA operations are estimated to account for 25.5% of its sum-of-the-parts or SOTP valuation, suggesting that the impact should not be significant.
Hence, the critical question is whether BUD's valuation has reasonably reflected its profitability headwinds, as the company aims to pay down debt further to lift investors' sentiments.
BUD last traded at an NTM adjusted P/E of 19.6x, or 10.1x EBITDA, if we take into account its enterprise value. According to S&P Cap IQ data, it's lower than its peers' EBITDA multiple median of 14.6x and below the one standard deviation zone under its 10Y average of 12.2x.
In other words, despite the recent controversy, BUD is not expensive relative to its historical averages, suggesting why it has not resulted in a massive selloff. Moreover, market operators are likely betting that the impact is likely limited to NA operations, indicating that it should not affect its valuation significantly, despite near-term worries.
As seen above, BUD remains well above its lows in October, suggesting investors have not been unduly concerned with the recent controversy.
Its below-average valuation also offers a credible defense for buyers looking to pick up the pieces from panic sellers as they worry about the extent of the fallout.
Notwithstanding, while we are confident that BUD likely bottomed out in October 2022, it appears to be re-testing a critical resistance zone, predicated against January 2022 highs. As such, bottom-fishers from its October lows could be motivated to cut exposure, taking some risks off the table from the recent controversy.
Hence, investors looking to buy more should consider a deeper pullback to more constructive support levels before adding exposure.
Rating: Hold (On Watch for a rating change).
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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Anheuser-Busch: Panic Selling Due To Recent Controversy Is A Bad Idea