After a 13% fall year-to-date, at the current levels, we believe Anheuser-Busch InBev stock (NYSE: BUD) is undervalued. BUD stock fell from around $63 in early January to under $55 now. The YTD 13% fall for BUD compares with -21% returns for the broader S&P500 index.
Looking at the longer term, BUD stock is down 33% from levels seen in late 2019. This marks an underperformance compared to some of its peers and the broader markets, with Diageo stock (NYSE: DEO) rising 3%, Molson Coors Beverage stock (NYSE: TAP) up 8%, and the S&P 500 index rising 17% over the same period.
This 33% fall for BUD stock since late 2019 can be attributed to 1. the company’s P/E ratio, which fell 5% to 18x trailing adjusted earnings currently, compared to 19x in 2019, and 2. a 30% decline in the company’s earnings to $3.02 for the last twelve months, vs. $4.32 in 2019, on a per share and adjusted basis.
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Anheuser-Busch InBev’s revenue grew 5% to $55.2 billion over the last twelve months, compared to $52.3 billion in 2019, primarily led by higher volumes across Latin America. The company faced headwinds in 2020 as the lockdowns resulted in declining beer sales, with many bars and restaurants closed. However, with the gradual opening up of economies globally, the strong end-user demand led to a 15% rise in sales in 2021. We expect the revenues to rise steadily over the coming years with increased volumes and better pricing.
Furthermore, in late 2021, the company announced a surprise push into the world of biotech. Rather than giving away the malt barley byproducts of the beer brewing process, the company will instead turn these into plant-based proteins that can be sold to the food and beverage industry. This will further bolster its top-line growth.
However, due to higher costs, the company’s net margins have declined over 600 bps to 10.7% currently, compared to 16.7% in 2019. The company’s COGS grew 13%, and operating expenses increased 10% between 2019 and 2021, for a 4% rise in total sales. Anheuser-Busch InBev total shares decreased 1% since 2019 to 2.0 billion now. A decline in net margins more than offset the rise in revenue and a marginal fall in total shares since 2019, weighing on its EPS.
Over the recent quarters, Anheuser-Busch InBev has benefited from better pricing and consumers shifting to more expensive brews. However, rising costs have weighed on the bottom-line growth. The company posted upbeat Q1 results, and it expects continued growth in the coming quarters.
While the company has good prospects, it faces headwinds from the current weakness in broader markets. The S&P500 has now entered near bear market territory with rising concerns of slowing economic growth given the high inflation, Fed action, and supply chain disruptions. These factors may impact Anheuser-Busch InBev’s performance, as well.
However, some of these factors appear to have already been priced in by the investors, given the 13% decline in BUD stock this year. We estimate Anheuser-Busch InBev’s valuation to be $70 per share, reflecting a 27% upside from its current market price of $55, implying that investors are likely to be better off buying BUD stock in the recent dip for gains in the long-term. At its current levels, BUD stock is trading at just 17x forward earnings, compared to the last two-year average of 25x, making the stock attractive from a valuation point of view.
While BUD stock looks undervalued, it is helpful to see valuable comparisons for companies across industries at Peer Comparisons.
Furthermore, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Starbucks vs. Commercial Metals.
|S&P 500 Return||1%||-20%||71%|
|Trefis Multi-Strategy Portfolio||2%||-21%||210%|
 Month-to-date and year-to-date as of 7/14/2022
 Cumulative total returns since the end of 2016