AB InBev Earnings Preview: How Will The Big Markets Perform?

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The world’s largest brewer, Anheuser-Busch InBev (NYSE:BUD), is scheduled to announce its Q2 and half-year results on July 30. We will focus on the company’s performance in the U.S., Brazil, and China — which together formed over 67% of the brewer’s net beer volume sales in Q1. [1] AB InBev has focused on expanding its already vast portfolio, comprising the likes of Budweiser, Corona, and Stella Artois, through mergers and acquisitions. It acquired Grupo Modelo and Oriental Brewery in 2013 and 2014, respectively, and other small craft breweries in the U.S. and local breweries in China. Having a well-spread business has allowed the brewer to take advantage of economies of scale and maintain industry-leading operating margins. In fact, in the U.S., Brazil, and Mexico – three of the four largest markets for AB InBev – the brewer has massive volume shares of 46.4%, 68.2%, and 57.8%, respectively.

But here is where the argument lies. Can Anheuser grow even further? It will be tough for the brewer to even maintain its strong, 50+% shares, especially in developed markets where the beer markets are relatively mature. Each of AB InBev’s three biggest markets exhibit different characteristics, and we’ll elaborate on the brewer’s growth potential in each of these markets for this quarter and going forward.

We have a $122 price estimate for Anheuser-Busch InBev, which is slightly below the current market price.

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See Our Complete Analysis For Anheuser-Busch InBev

United States

The biggest market for Anheuser is also the biggest downer in terms of organic growth presently. The company’s sales are spread across 130 countries, but 30% of this net revenue last year was contributed by the U.S. alone. With a mature beer market and an already peaking market share for Anheuser, it might be difficult to extract more growth, going forward. What’s worse for AB InBev is that its presence is mainly in the domestic beer category, which is the most underperforming category of the U.S. beer market.

However, in a bid to reverse this declining trend, the company has looked to penetrate the craft and imported beer segments which, although are only 26% of the beer market presently, are growing by solid high single-digit percentages. In addition, the successful product launches in the premium and flavored drinks categories, such as Bud Light’s Lime-a-Rita drinks, have helped boost sales. Although AB InBev is still losing share in the U.S., the rate of decline has shrunk–a sign of growth perhaps?

According to Anheuser’s estimates, the industry-wide selling-day adjusted sales-to-retailers declined 0.6% in 2014, after a larger 1.8% decline in 2013, and in the first quarter, the figure fell by only 0.5%. Beer volumes might decline again this quarter, but a smaller rate of decline would mean that the company’s U.S. game is on point. Also, higher revenue per liter could drive top line growth.

Brazil

Brazil is an emerging economy with a low beer penetration, which means there is growth potential. However, weak economic conditions coupled with high interest and inflation rates, and negative customer sentiment, continue to hamper consumer spending in the country. AB InBev’s volumes were up only 0.4% in Q1. As the company overlaps the strong growth in volume sales due to the FIFA World Cup activation last year this time, volume growth might be negatively impacted in Q2. But where growth lies in Brazil is in strong revenue per hectoliter growth.

Economic inequality in Brazil is one of the highest in the world. Despite having a small proportion of high net worth individuals (HNWI), Brazil’s combined HNWI wealth of around $4 trillion is the third largest for any country. [2] High interest and inflation rates and tight credit availability don’t tend to adversely impact the more affluent individuals, and this could be one of the reasons why AB InBev’s premium beers have grown at a rapid pace in the economy that is otherwise struggling. And there is room for further growth. The brewer’s premium brands grew 20% in Brazil last year, with Budweiser registering an impressive 40% growth. But premium brands still form only 8% of the industry-wide volumes in the country, compared to 75+% of net volumes in the U.S. This presents further potential growth opportunities in the premium segment in the Brazilian beer market. Higher proportionate sales of the brewer’s premium brands resulted in an impressive 11% rise in revenue per hectoliter in Q1, and could boost the top line again this quarter.

China

China is the world’s largest beer market in terms of volumes and is set to overtake the U.S. in terms of beer revenues, too, in the next couple of years. However, growth in the country’s beer market has been somewhat thwarted by the slowing economic conditions, with a 2% fall in industry-wide volumes in Q1. There is a lot of scope for AB InBev in this market where, despite a fall in overall volumes, the company’s volumes remained positive at 4.7%, reflecting strong growth in the brewer’s focus brands in the country. AB InBev improved its market share in the country by 90 basis points to 15.9% at the end of last year. Including the recent mergers and acquisitions, the share rose to 16.8%. In Q1, the brewer’s share further increased to 18.5% on solid volume growth. AB InBev could be in good shape to further improve volumes organically in China, once demand for beer starts rising again, as beer penetration is still low in the country and incomes are rising.

And then there are currency woes. Markets outside the U.S. contribute ~70% of AB InBev’s top line. Depreciating foreign currencies had a negative 9 percentage point impact on net sales in Q1, and could continue to drag down the top line, considering the volatility in crucial currencies around the world.

AB InBev’s growth multiplies with its numerous acquisitions, but we will keep a close eye on the organic growth, considering how certain significant beer markets are facing headwinds.

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Notes:
  1. AB InBev press release []
  2. Sales of luxury cars boom in Brazil, June 2014, ft.com []