Anheuser-Busch InBev (BUD) has significantly underperformed mega-cap consumer defensive stocks since it closed on the SABMiller acquisition in late 2016. Back then, the BUD ADSs that trade in New York changed hands for around $130 per share. Currently, they change hands for $61.85 per share, while shareholders only collected around $12 per share in dividend cash in the intervening period (net of Belgian withholding tax).

Usually when examining this kind of thing, I like to ask a simple question: “is this an earnings problem or a valuation problem?”. Management has dominion over the former but can’t control how much we decide to value a dollar of the company’s profits.

In this case the answer is a little bit of both. On the valuation side, the P/E ratio attached to Anheuser-Busch stock has decreased from 25x to around 17x in that period. On the earnings side, the low-hanging fruit that was supposed to come from synergies and cost cutting following the integration of SABMiller has not materialized in the form of reported bottom-line dollars. In the 2012-2015 period, Anheuser Busch saw profits grow from $7.2 billion to $8.5 billion. This year, net income is expected to land in the $6.8 billion area before growing to $7.8 billion in 2024. Earnings are only expected to move decisively beyond their past-decade highs in the 2025-27 period, which I base on Value Line estimates.

Two things make this performance worse than it already looks on paper. Firstly, shareholders have not been able to lean on the crutch of stock buybacks à la Kellogg, Coca-Cola et al in order to boost per-share profits. In fact, the share count here has actually risen from 1.668 billion in 2015 to 2.050 billion currently. Secondly, net debt has risen from $42 billion in 2015 to around $70 billion today.

Without wishing to minimize the recent poor returns experienced by Anheuser-Busch stockholders, on the whole the above is not the result of selling less beer. The obvious exception to that is in North America, where share gains from craft beer and spirits have contributed to an 18% decline in the company’s annual volume over the past ten years. Globally, though, Anheuser-Busch sells around 45% more beer on a straight-up volume basis than it did a decade ago thanks to its acquisition spree. Further to that, annual organic revenue growth over the 2012-2019 period, incorporating pre- and post-SABMiller while ignoring to impact of COVID, ranges from 2.5% to 7.2%. For the 2020-2022 “COVID years”, annual organic revenue growth reads as follows: -3.7%, 15.6% and 11.2%.

Part of Anheuser-Busch’s struggles to grow the bottom line can be explained fairly easily by its higher debt load. In 2015, the company paid annual interest of $1.8 billion to service its debt. Last year, Anheuser-Busch recorded an interest expense of over $3.5 billion. If you isolate earnings to debt-neutral metrics like operating profit then they are indeed higher than the 2012-2015 range.

The other part is straight up lower profitability. Anheuser-Busch’s operating margin has fallen by around 8 points over the past five to ten years. That is a concern because brewing should be a brute force scale business. All else equal, the company’s higher volume and revenue should translate fairly predictably over to higher margins and earnings growth. The recent bout of inflation and higher raw material costs explain a good chunk of this: last year, the company’s gross profit margin was 54% versus 61% in 2019.

Another often unremarked issue is currency. Thing is, the current iteration of Anheuser-Busch is a very different proposition to your grandfather’s Anheuser-Busch. These days, the business of selling Budweiser, Bud Light and Michelob Ultra across North America only represents around 30% of its revenue and earnings. The combined operations of Mexico, Brazil and Colombia are just as important in terms of profit contribution to HQ in Belgium as the United States is.

This has opened up the company to some significant currency effects since its non-US businesses report profits in local currency while the global company reports profits in dollars. Also, key raw materials that go into making beer are often traded in dollars while the sales of Brahma, Modelo and Águila are recognized in Brazilian reais, Mexican pesos and Colombian pesos respectively.

Since 2015, the Brazilian reais and Colombian peso have depreciated by around 55-60% versus the US dollar. The Mexican peso has declined by a more modest, but still significant 35%. There is a bit more to the story — margins in Brazil have come under pressure as Dutch firm Heineken entered the market, for example — but currency swings go a fair way to explaining why the stock has fared so poorly over the past few years. The company has simply had a US dollar problem for much of that time.

This obviously has big implications for your mom and pop shareholders, the major one being that their short and medium-term returns can be heavily swayed by macroeconomic fluctuations.

With that said, I would be wary of consigning Anheuser-Busch stock to the “dead money” scrapheap. Returns over the past 6-7 years have been heavily affected by a downturn in emerging markets, the SABMiller deal, COVID, inflation, a starting valuation of 25x earnings, and a dividend payout ratio that was rapidly approaching 100%. That is a potent mix for a stock that makes two-thirds of its profits from less developed economies and carries a high debt load. The former headwinds have lowered net profit margins, but with scope for the company to regain ground as these issues abate. At the same time, the 16-17x earnings valuation now only requires long-term underlying growth of 4-6% to meet the hurdle for acceptable returns versus 7-9% previously, with the kicker that the company is now generating over $5 billion in retained earnings to help it achieve this.

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