After rising more than 2x from its March 2020 lows, at the current price of $76 per share, we believe Anheuser-Busch InBev has reached its near-term potential. BUD’s stock has rallied from $35 to over $75 off its recent bottom compared to the S&P 500 which increased over 85% from its recent lows. The stock was able to beat the broader market over the last one year, 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 recent spike in Covid cases in several countries is a concern, the successful vaccine rollout (which was not there during the first phase in 2020) has minimized the possibility of another strict global lockdown. The company’s revenues and earnings are expected to see significant improvement in the coming quarters as pubs and restaurants gradually open up and supply constraints ease. While the stock is still 7% 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. Our dashboard What Factors Drove 15% Change In Anheuser-Busch InBev Stock Between 2018 And Now? provides the key numbers behind our thinking.
Some of the rise in the stock price between 2018 and 2020 is justified by a 3x jump in the company’s P/E multiple from 30x in 2018 to 100x in 2020. This was despite the company’s revenue and margins declining. BUD’s revenues decreased by 12% between 2018-2020 mainly due to changing consumer preferences, as health-conscious consumers are moving away from beer. Margins remained very volatile during this time due to tax law impact and heavy derivative losses. Margins dropped in 2020 due to the impact of the pandemic, with the drop in margins being 64% between 2018-2020. On a per share basis, earnings declined from $2.17 in 2018 to $0.69 in 2020. As stock price recovered sharply in the second half of 2020 in anticipation of economic recovery, the P/E multiple shot up to 100x in 2020 and currently stands at 110x. We believe there will be a sharp correction in the multiple as the EPS improves significantly in 2021. However, the effect of a lower multiple will be offset with higher earnings.
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Where is the stock headed?
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. For full year 2020, revenues dropped more than 10% 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.
As the global economy opens up and lockdowns are lifted in phases, opening up of restaurants and pubs and restarting of live events is expected to ramp up faster, helping the company tap rising consumer demand. 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 Israel. 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 Q1 2021 results, where BUD’s volume and organic revenues saw a y-o-y growth of 13.3% and 17.2%, respectively. The company is likely to see healthy revenue growth in FY2021 from a lower base in FY2020.
With investors’ focus having shifted to 2021 and 2022 numbers, 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 in certain economies, new virus strains coming into the picture, and the re-imposition of lockdowns in a few countries could prove to be an impediment in this growth path. If the rise in cases warrant a re-imposition of strict lockdowns in major economies, then the stock could see a sharp drop. But even in the absence of another lockdown, a major rise in the stock is unlikely as the stock has already more than doubled over recent months accounting for the sharp revenue and earnings growth in the coming quarters. BUD’s stock is likely to remain around its current level in the near term. As per Trefis, BUD’s valuation works out to $74 per share,
While BUD stock may have moved, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for Coca-Cola vs Merck shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.