Anheuser-Busch Stock Recovers 100% – What’s Changed?

After more than doubling since its March lows of 2020, at the current price of $71 per share, Anheuser-Busch InBev stock (NYSE: BUD) seems to have reached its near-term potential. BUD’s stock has rallied from $35 to over $70 off its recent bottom compared to the S&P 500 which increased over 70% from its recent lows. The stock was able to beat the broader market over the last few months, with the US government announcing a string of measures along with stimulus packages announced in other economies to keep businesses afloat. As the global economy opens up and supply constraints ease, volume sales are likely to rise in the coming quarters. Though the stock is still close to 15% below its December 2019 level, it is unlikely to see any major movement anytime soon due to slowdown in the beer segment even before the pandemic. Additionally, the new virus strain and lockdown in the UK will limit any major upside in the stock for now. BUD’s stock is expected to hover around its current level of $70 in the near-term. Our dashboard What Factors Drove -36% Change In Anheuser-Busch InBev Stock Between 2017 And Now? provides the key numbers behind our thinking.

Some of the drop in the stock price between 2017-2019 is justified by the 4.6% decline in revenues during this period. BUD’s revenues decreased from $54.9 billion in 2017 to $52.3 billion in 2019 mainly due to changing consumer preferences, as health conscious consumers are moving away from beer. Margins remained very volatile during those two years due to tax law impact and heavy derivative losses. But largely the margins improved in 2019 due to the company’s deleveraging program. On a per share basis, earnings increased from $3.98 in 2017 to $4.80 in 2019.

Though earnings went up, the steady drop in revenues over recent years led to a decline in the P/E multiple from 28x to 17x between 2017-2019. The multiple crashed to 7x in early 2020 following the outbreak of the coronavirus pandemic which led to shutting down of pubs and restaurants. However, it has recovered over the last few months after stimulus measures were announced and currently stands at about 15x, still lower than its 2019 level. We believe the multiple is likely to go up slightly as the global economy opens further.

Outlook?

The global spread of coronavirus led to lockdown in various cities across the globe, which affected industrial and economic activity. This took a toll on consumption and consumer spending, which was reflected in BUD’s Q2 2020 and Q3 2020 results where its revenue declined by 18% y-o-y. The widespread closing of restaurants and bars, plus the cancellation of sporting events, concerts, and nearly every other form of public entertainment across key markets led to a plunge in beer sales, thus affecting the stock price adversely.

However, there have been signs of lifting of the global lockdowns over recent months. As the global economy opens up and lockdowns are lifted in phases, consumer demand is slowly picking up. Any further recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. With the lifting of lockdowns, reduction of supply bottlenecks is expected to help a company like BUD, which has a global supply network, to increase its volume. This was partially reflected in the company’s Q3 results, where BUD’s volume and organic revenues saw a y-o-y growth of 1.9% and 4%, respectively. The company is likely to see healthy revenue growth in FY2021 on a lower base of FY2020.

With investors’ focus having shifted to 2021, the stock has seen healthy growth over recent months in anticipation of strong revenue and margin growth. However, the recent surge in Covid positive cases, a new virus strain coming into the picture, and the re-imposition of lockdowns in the UK could prove to be an impediment in this growth path. If the rise in cases warrant a re-imposition of lockdowns in other major economies as well, then the stock could see a sharp drop. Even in the absence of another lockdown, a major rise in the stock is unlikely after having doubled over recent months. BUD’s stock is likely to remain around its current level in the near term. As per Trefis, BUD’s valuation works out to $70 per share.

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