Anheuser-Buch InBev stock (NYSE: BUD) has dropped 36% so far in 2020, while alcoholic beverages rival Diageo stock (NYSE: DEO) has dropped around 17% so far in 2020. But wait a minute, if we compare the stock price trends for these companies over recent years, we can see that BUD’s stock price has decreased by 53% from $112 at the end of 2017 to about $52 as of 8th July 2020. What is interesting to note is that DEO’s stock price declined by only 4.4% during the same period. This was the case despite BUD seeing much better growth in its margins compared to DEO between 2017-2019. In such circumstances, what is driving DEO’s superior stock performance vis-à-vis BUD? It is the revenue growth and P/E multiples (also dependent on shareholder return policy). Our dashboard Anheuser-Busch InBev vs. Diageo: Does The Stock Price Movement Make Sense? has the underlying numbers.
Sure, BUD’s net income margins have increased from 16.7% in 2017 to 19.9% in 2019. Margins crashed in 2018 due to derivative losses, but recovered in 2019 due to lower interest expense. Though DEO’s margins saw a very modest rise in comparison to BUD, DEO’s margins have consistently been higher than BUD’s (26% vs. 20% in 2019). Other than margins, one of the key elements is the revenue trend and growth. BUD’s revenues have consistently declined in the last two years from $54.9 billion in 2017 to $52.3 billion in 2019 due to changing consumer preferences. At the same time, DEO’s revenues increased from $15.3 billion in 2017 to $16.6 billion in 2019, led by growth across all geographies.
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Additionally, the P/E multiple of both companies has seen a lot of volatility, with DEO’s multiple being higher than BUD’s since 2019. Though both companies saw a decline in their stock price and multiples, DEO’s P/E ratio currently stands at 21x, almost double that of BUD’s 11x. We believe that DEO’s multiple will continue to remain high and might even increase its gap with BUD in the near term. What could drive this? It is the performance outlook and shareholder return policy.
How Do Businesses Of BUD and DEO Compare?
Let’s have a closer look at the core business prospects. Though both companies are alcoholic beverage giants, Anheuser-Busch mainly sells different brands of beers while Diageo offers various drinks like whiskey, scotch, vodka, rum, etc.
With more consumers moving away from beer due to health issues, BUD has seen a decline in revenues over recent years. In contrast, Diageo has been increasing the share of premium scotch in its portfolio of offerings, which is helping and is likely to continue to help in achieving revenue and margin growth in the medium term. The current pandemic induced lockdowns have affected global supply chains and consumer spending with pubs and restaurants being closed down, leading to expectations of lower revenues for both the companies in 2020.
However, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. compared to the rate seen in April-May to boost market expectations. Additionally, the gradual lifting of lock downs is also giving investors confidence that developed markets have put the worst of the pandemic behind them. Following the Fed stimulus — which helped set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view, with investors now mainly focusing their attention on 2021 results.
With the gradual lifting of lockdowns and easing of supply bottlenecks, 2021 is expected to be a year of healthy revenue growth for both companies. However, DEO’s revenue growth is likely to be much higher than BUD with its increasing focus on premiumization.
What else differentiates these two companies is their shareholder return policy, BUD has announced a 50% reduction in its 2019 dividend announced earlier, in order to save cash during the pandemic. This is the second time in two years that the company has slashed its dividends. Also, the investors are unlikely to receive any dividend in 2020 as the company is concentrating on deleveraging amidst this crisis. On the other hand, Diageo has a consistent history of dividend payment, with the last payout in April 2020. Currently, BUD’s dividend yield stands at 1.58%, lower than DEO’s 1.95% yield. This is reflected in the difference in P/E multiples of these two companies, with DEO’s almost double that of BUD’s.
Thus, better revenue growth and higher margins in 2021, along with a consistent shareholder return policy is expected to lead to an uptick in DEO’s P/E multiple, which could lead to a 5% upside to the stock. As per Diageo’s Valuation, Trefis has a price estimate of $147 for DEO’s stock, higher than the current price. Trefis has a fair price estimate of $55 per share for Anheuser-Busch InBev’s stock.
While Diageo’s stock has been more consistent compared to BUD, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.