On Friday beer giant Anheuser-Busch InBev (BUD) released its Q3 2019 results. With the stock down over 10% at the closing bell the market reaction tells you what you need to know. The short version is non-existent volume growth and an uptick in costs and income taxes eating into profit. Moreover, the company expects that performance to carry on into the final three months of the year.
The Global Volume Picture
I’ll try to sum up the main points as succinctly as possible. First, volume growth (or lack thereof). The most obvious way for Anheuser-Busch to grow its profit is to sell more Budweiser, Stella Artois and Brahma every year. Over the three months ended September 30th the company sold 143.4 million hectoliters, down 0.5% year-on-year on an organic basis. Over the first nine months of 2019 total volume sold came in at 419.4 million hectoliters, up 1% in organic terms on Q3 2018.
North America and Asia Pacific (specifically China) led the way on the volume declines front. In North America, Anheuser-Busch sold 29 million hectoliters in the third quarter. That was roughly 975,000 fewer than it managed in 3Q18. As for Asia Pacific, the company sold 27.5 million hectoliters in 3Q19 compared to 29.5 million in 3Q18. Volumes in China were down 5.9% year-on-year. Given those two regions account for 40% of company volume (and an equally big chunk of profit) that is not great to see.
On the plus side the company is putting in stronger performances in several key emerging markets. For instance, its Mexican business posted high single-digit volume growth (ahead of the wider beer industry there) in the quarter and mid-single digit volume growth over the first nine months of the year. Throw price increases into the mix – more on that below – and the country is seeing double-digit revenue growth. Colombia and South Africa also saw impressive volume and price growth.
Pricing, Third Quarter Earnings
Despite an overall sluggish volume picture the company realized a higher global average price for its products. For instance in China the company raised prices by 6% per hectoliter, enough to offset the volume decline mentioned above.
Globally, revenue per hectoliter clocked in 3% higher in 3Q19 year-on-year. That was enough to see total organic revenue tick up 2.7% after stripping out things like negative foreign currency movements. Over the first nine-months of this year revenue per hectoliter growth was 3.7%. Additional 1% organic volume growth on top of that brought total organic revenue growth to 4.8% year-on-year.
Unfortunately for Anheuser-Busch its costs shot up versus 3Q18. The net impact? Normalized earnings before interest and taxes (EBIT) came in 2.6% lower (on an organic basis) compared to 3Q18. Coupled with a higher income tax expense, this resulted in underlying profit per share slumping to $0.94. That was down $0.17 on the $1.11 posted last year. For the nine-month period, underlying profit per share stood at $2.76. That was down $0.16 on the $2.92 made at this point last year (again on the back of a higher income tax rate).
As it stands the company is generating annual EBIT in the $17 billion range. Subtracting net interest expenses ($3.5 billion), income taxes (another $3.5 billion) and profit attributable to non-controlling interests ($1.3 billion) results in annual profit of around $9.2 billion. Dividing that by the 1.98 billion shares in existence gives us a current annual earnings power of around $4.40 per share.
On that basis it’s easy to see why the shares enjoyed a strong 2019 pre-earnings announcement. At the start of January folks could pick up Budweiser stock for just $65.80 per share; a figure which pointed to a forward price-to-earnings ratio under of 15. Needless to say that is way too cheap for a high quality defensive stock in the current macro environment.
Yesterday the shares closed at $81.83 on the New York Stock Exchange, equivalent to around 18.5x annual earnings. Call that an earnings yield of 5.4%. The annual cash distribution – currently at €1.80 per share (~$2 per share at current exchange rates) – points to a dividend yield of 2.45%.
I’m inclined to think that represents decent value. Growth-wise the company is probably in a reasonably good position given its size and industry. A good thing about Anheuser-Busch is that it tilts nicely towards growing markets. According to company and third-party data, the top twenty beer markets in terms of growth will put on incremental volume of 350 million hectoliters in the 2017-2027 ten-year period. In three of the largest markets – namely the US, Mexico and Brazil – Anheuser-Busch already commands the number one market share spot.
Furthermore, as consumers in emerging markets get wealthier, the scope for price increases rises too. All-in-all that produces a decent runway in which to grow volume/price and therefore revenue. (All things being equal the company can then convert that top line growth to bottom line net profit, thus adding real growth to that 2.45% annual dividend).
Finally, the post-dividend cash situation. As it stands, the dividend takes up around $4 billion a year of company profit. That leaves around $5 billion left over. Now, at the moment the company needs to throw that figure at debt reduction to meet its 2x EBITDA debt target. I have net debt at around 4x EBITDA right now, so there is still some way to go.
In its own right debt reduction is worth a small amount of growth to the bottom line through reduced interest expense. Eventually that surplus cash can be used for higher returning endeavors once debt is down to the desired level. Throwing all those points together should give Budweiser stock a decent shot at double digit returns from today’s price.
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