Why We Believe Anheuser-Busch’s Stock Is Worth $117

by Trefis Team
Anheuser-Busch InBev
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Anheuser-Busch InBev (NYSE:BUD) has been plagued with a soft U.S. market, which is the main factor in the company having a slightly weak first half. While the company noted its strongest market share performance in the country in almost four years in Q2, the metric still fell 35 basis points. On the other hand, Mexico, China, and Brazil have led the organic revenue growth for BUD, aided by the World Cup, although the truckers’ strike in Brazil played a slight dampener. Earnings growth this year has been led by margin improvement, as a result of synergy and productivity savings. These trends are expected to continue, with revenue growth driven by emerging economies, particularly Brazil and China, and margin improvement fueling the increase in EPS. In an interview with Food Dive, the Zone President of North America, Michel Doukeris, stated that the company is focusing on internal growth and garnering synergies from its merger with SABMiller, rather than looking for other acquisitions to drive growth. If we look at the past, the revenue per hectoliter growth posted by the company in the last five years, at 4.6%, has exceeded that of all its global FMCG (Fast Moving Consumer Goods) peers. Moreover, with the integration of SABMiller, the company has placed itself in a strong place to continue its growth momentum, by positioning it toward emerging markets that are poised for higher growth.

We have a $117 price estimate for Anheuser-Busch InBev, which is higher than the current market price. The charts have been made using our new, interactive model. You can click here for our interactive dashboard on Estimating Anheuser-Busch’s Valuation to modify our driver assumptions to see what impact this will have on the company’s revenues, earnings, and price estimate.

We have based our price estimate on expected revenues of $58.8 billion in FY 2019, net income margin of 18.1%, and a P/E multiple of 22. Despite a challenging environment, the company has also been able to improve its margins, largely due to premiumization, as well as a result of synergy and productivity savings. Our revenue and margin growth forecasts are based on the following factors:

1. Softness in the U.S. Market: BUD has been witnessing a soft market in the U.S., with industry volume declines exacerbated by market share declines. The company estimates that industry Sales-to-Retailers (STRs) in the United States declined by 2.4% in Q2, while BUD’s STRs were down 3.1%. In the first half of the year, the company’s market share fell 45 basis points. On the other hand, the company’s Above Premium brand portfolio had another strong quarter, gaining 100 bps of market share. This growth was led by Michelob Ultra, continuing its run as the top share gainer in the U.S. for the 13th consecutive quarter. Looking ahead, while we expect the overall North American revenues to decline in 2018, its Above Premium segment should deliver strong growth.

2. FIFA World Cup Sponsorship: According to BrandZ, Budweiser is the most valuable beer brand in the world and the number-one global beer brand by volume. Budweiser was the global beer sponsor of the FIFA World Cup, held in Russia in June-July. Partnering with such a massive event, which boasts of an audience of over 3.2 billion, bodes well for the company. Its biggest commercial campaign called “Light Up the FIFA World Cup.” was activated in more than 50 countries, which included not only those where the brand already has a significant presence such as China, Brazil, the U.K., and Russia, but also new markets like Colombia, Peru, Ecuador, Australia, and Africa. Consequently, Budweiser’s sales outside the U.S. were up by more than 10%. Moreover, greater brand awareness should help to drive sales in the future, with the brand expecting a bump of 45 basis points for the full year.

3. High-Growth Brands: BUD’s ‘The High End’ division, made up of its global specialty and craft brands, has been established in 22 markets, accounting for roughly 70% of the high-end opportunity worldwide, as at the end of FY 2017. In the first half of the year, the ‘High End’ company recorded revenue and EBITDA growth of 20%. This presents BUD with a considerable opportunity to encourage consumers to trade-up to more high-end products, in both developed and in emerging markets.

4. Synergies from SABMiller Acquisition: Anheuser continues to reap benefits from the synergies from its acquisition. In the second quarter, BUD delivered $199 million of synergies, bringing the total synergies captured to-date to almost $2.5 billion. The synergy guidance remains at $3.2 billion which is expected to be delivered within the four-year period following the close of the combination. This should continue to benefit the company’s EBITDA margin in FY 2018.

5. Potential of China: Revenue in the country grew by 6.8%, driven by volume growth of 3% and revenue per hl growth of 3.7% in Q2. The High End company recorded triple-digit volume growth, led by the strong performances of Corona, which is the number one imported beer. Moreover, the e-commerce business had another stellar quarter, with higher share online than offline. The market share of the company continued its strong rise to over 20%, in an industry that underwent a modest recovery after a decline in 2017. However, the margins fell in the quarter, with premiumization and productivity gains more than offset by higher marketing spend. Looking ahead, the prospects of the company look positive in the country, as it occupies a place in the faster-growing premium and super-premium segments, as well as the online channels.

6. Easing Margin Pressure: BUD managed to improve its EBITDA margins by 85 basis points in Q2, due to a healthy top line, cost efficiencies, and synergy capture, despite the heavy marketing expenditure for the World Cup. The company expects the growth to accelerate in the remainder of the year, as the marketing and sales expenditure is concentrated in the first half of the financial year. Consequently, the margin pressure should ease as the year progresses.

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