Anheuser-Busch InBev: Slammed Last Week

by The Compound Investor

Like most of you, I have been following the market carnage over the past week or so. As fate would have it I am actually in the middle of a house move so haven’t been able to write much. Anyway, where to begin? There’s no doubt the economic situation is bad out there. I mean, just check out some of the industrial production figures coming out of China. Even if it only lasts a quarter or two, coronavirus is having a significant economic impact.

In terms of the markets, it looks like an increasing number of value picks are popping up. Exxon Mobil traded sub-$50 per share at one point and still offers a near-7% dividend yield. It looks like I was a bit too early with my previous coronavirus piece! Royal Dutch Shell and BP are in a similar boat. Heck, even Chevron is throwing off well over 5% in terms of its dividend yield.

Those look like excellent long-term opportunities if you don’t mind the near-term volatility. That said, I purposely wanted to pick out a cheapish defensive stock. Most of the “go-to names” haven’t moved impressively enough yet, at least relative to their long-term historical averages. The likes of PepsiCo, Coca-Cola and Procter & Gamble remain at, or even above, the 20x annual profit mark.

Anheuser-Busch InBev

That said, I like where Anheuser-Busch (BUD) stock is trading at right now. The beer giant had the misfortune of releasing financial results right in the middle of last week’s market fall. Although results were not great, the sell-off has been exacerbated by coronavirus fears. I mean, at the start of the week the shares traded for just under $70 each. They closed out Friday at around the $58.40 mark. That’s a 17% drop in the space of just five trading days.

Anyway, let’s start with those 2019 results. Organic revenue increased by 4.3% in fiscal 2019 and by 2.5% in the fourth quarter (“4Q19”). In terms of the former number, revenue per hectoliter growth of 3.1% was topped up by 1.1% volume growth. Sales of the company’s global brands – Budweiser, Stella Artois and the unfortunately named Corona  grew by 5.2% in 2019 and by 2.1% in 4Q19. These brands typically command premium prices outside of their home markets. To sum things up, the company sold more beverages while also realizing a higher overall per-unit price. So far, so good.

Unfortunately, Anheuser-Busch also reported some serious commodity price inflation in 2019. Total cost of sales increased by 7.4% last year and by 5.4% on a per-hectoliter basis. Foreign currency headwinds also took a small chunk out of the company’s dollar-denominated profit figures. Underlying earnings per share came in at $3.63 for the year, down around 11% on 2018’s figure.

Coronavirus & Guidance

Coronavirus – the big one as far as last week, and indeed this entire quarter, is concerned. In terms of Anheuser-Busch specifically, China is obviously a fairly large market. It is not surprising that beer demand has dropped given what is happening over there. Folks will not socialize as much in bars and restaurants for obvious reasons, while supermarket and other retail demand for beer is down too.

Now, the company estimates that COVID-19 has cost it around $170m in EBITDA in China. That figure covers just the first couple months of 2020. It also expects total EBITDA to clock in around 10% lower in 1Q20 compared to last year. That is clearly not so good, but I note that management expects overall EBITDA to grow somewhere between 2% and 5% in 2020. That seems a tad optimistic to me right now but we will have to wait and see.

Valuation

Including the aforementioned currency headwinds and cost inflation, the company generated $13,400m in cash from operations last year. Capital spending took up around $4,850m of that and cash dividends another $5,000m. Back of the envelope math puts free cash flow at $8,500m, or $3,550m on a post-dividend basis.

Now, the company’s market-cap is currently sitting around the $115,000m mark based on 1,985m shares outstanding. Quick math suggests you can buy Anheuser-Busch stock for around 13.5x 2019 cash profit based on Friday’s closing price.

That is a good deal in my view. If, or rather when, coronavirus subsides, that valuation multiple will not last very long. In the meantime folks get a circa 3.5% dividend yield which looks well covered by cash profit. There aren’t too many value picks in the consumer defensive space just yet, but obviously that could change very quickly if things continue to get worse. For now, I think Anheuser-Busch stock is one of the sector’s best large-cap choices.

Note

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