Beer is boring. That’s Wall Street’s parochial view—if the performance of the stock of the world’s biggest brewer, Anheuser-Busch InBev, is any guide.
After a 22% stock drop year to date to about $87 per share, the American depositary receipts of the Leuven, Belgium–based company are back to where they were about six years ago. By comparison, the broad market has roughly doubled since mid-2012. The stock’s all-time high was $133, reached in September 2016.
AB InBev’s (ticker: BUD) stock price will need some time to improve, but it seems too low relative to the challenges the company faces. The market’s strong dislike of AB InBev could offer an opportunity for double-digit returns for patient, income-oriented investors.
Beer volumes in North America—with the exception of craft and premium beers—have generally been flat to down for years, notes analyst Brett Cooper, with Consumer Edge Research. In the U.S., AB InBev’s Budweiser brand skews mainstream and has lost share, he says. In the first half, AB InBev’s total North American volumes were down 4.5%.
Another strike is the emerging markets orientation of AB InBev’s sales since the $100 billion-plus purchase of SABMiller in 2016. Emerging markets are unloved and have underperformed all year. In 2015, AB InBev got about 66% of its volume from emerging markets, and that increased to 72% last year. The rising greenback hurts the company because it reports in dollars and much of its sales are in other currencies.
With these challenges, earnings per share have been stuck near $4.50 to $5 for the past few years.
A more worldly view of this megabrewer, however, presents a fuller picture of long-term growth outside North America. Moreover, AB InBev continues to deliver on the cost cuts it has promised, reaching about $2.5 billion a year so far, near the promised annual savings of $3.2 billion.
AB InBev is three times bigger and much more efficient than its next competitor, Heineken (HEINY), with unparalleled scale, says a bullish Martin Leclerc, a money manager with Barrack Yard Advisors. It sports some 18 brands, such as Budweiser, Stella Artois, and Corona, with over $1 billion in global sales each.
“It’s a blue-chip proxy for emerging markets and a play on rising middle classes there,” says Leclerc, who was a recent buyer at a price “in the 80s” per share. Bud isn’t down market in emerging markets, Leclerc points out. It’s the leading beer in Brazil, as is Bud Light in Mexico, while Corona Extra is the top seller in China among premium beers.
Recent results show a glimmer of improvement: In the first half of 2018, Asia-Pacific revenue rose 6% on a nearly 3% volume rise. Latin America posted a 6% sales rise on 1.5% volume growth. Outside North America, AB InBev is generally showing good growth for a beer company.
In the first half, total revenue was flat at about $27 billion, and net profits rose to $3 billion from $2.9 billion, or $1.50 versus $1.48. After adjusting for acquisitions and divestitures, currency changes, and extraordinary items, total organic sales rose 4.7% and EPS to $1.83 from $1.69. AB InBev shares now trade at about 16.7 times 2019 consensus EPS estimates of $5.16 next year. That’s a 36% plunge in valuation from the 26 forward price/earnings ratio it fetched about two years ago.
The company is transforming itself, adds Darren Pollock, a portfolio manager at Cheviot Value Management, which holds AB InBev shares. “The game plan—trying to grow sales organically while focusing on deleveraging—is not as exciting to Wall Street as making large acquisitions and pushing for faster near-term growth. But the company has strong management and a long-term mind-set, and holding the dominant position in emerging markets is a tremendous long-term advantage,” he says.
“We expect low- to mid-single-digit revenue growth translating into mid- to high-single-digit EPS growth,” he says. Combined with a 5.5% dividend yield and this could pave the way for double-digit average annual gains over the next several years.
The dividend requires a caveat. Leverage is a concern. With $109 billion in debt, AB InBev’s ratio of net debt to earnings before interest, taxes, depreciation and amortization, or Ebitda, is 4.9 times. Though AB InBev is in a stable consumer business and its cash flow easily covers the annual payout, investors’ worry about a dividend cut has intensified, given the yield.
Pollock is unperturbed about a dividend cut. “Even a one-third cut in the dividend [to 3.7%] would still be a great yield,” and it would free up some cash for investment, he says.
AB InBev, which is reporting third-quarter results on Oct. 25, declined to comment. It has said it is committed to getting its ratio of net debt to Ebitda down to two times and that its goal is for dividends to grow in line with the business.
If emerging markets sentiment improves, that will be a short-term boost for AB InBev shares. For the long term, however, shareholders could see a handsome and relatively low-risk return as AB InBev appears to be well positioned for the future.