Anheuser-Busch InBev Produces Solid Q1 Results, Yet The Stock Now Appears Fairly Priced

Investment Thesis

Anheuser-Busch InBev SA/NV (BUD) produced a solid set of Q1 FY24 results which suggest the brewer’s core brands and shifting focus on premium beers is working well for the firm.

Since my last coverage of BUD back in September, where I rated them a Strong Buy, the brewer has been focusing on growing unit profitability through a combination of top-line revenue growth and operational efficiency improvements.

While total volumes did decline in Q1, solid operational improvements led to margin expansion, while 2.65% YoY organic sales growth was achieved thanks to consumers purchasing more premium beer from the brewery.

The recent rally in BUD shares has, however, resulted in some upside potential in the brewery’s stock being eliminated, with shares now trading at what I calculate to be just a 9% discount relative to their fair value.

As a result, I downgrade my rating for BUD to a Hold at the present time. While I will not be selling any of my shares in the brewery, I cannot advocate for the building of a position in the company currently due to a lack of margin of safety.

Company Background

Anheuser-Busch InBev is the largest brewery in the world. From their base in Leuven, Belgium, Anheuser-Busch InBev sells over 500 different iconic brands of beer across more than 150 countries worldwide.

The company has spent the last thirty years being serial acquirers of other breweries, with the most recent 2016 purchase of SAB Miller being perhaps the last large-scale purchase made by Anheuser-Busch InBev. Such a rapid growth in size has allowed Anheuser-Busch InBev to obtain an invaluable portfolio of brands, which today culminates in the firm controlling around 30% of the market share in the entire beer industry.

Michel Doukeris continues to run Anheuser-Busch InBev as CEO, having taken over the helm back in 2021. I have been personally impressed by his ability to manage some acute challenges the brewer has faced over the past four years while also effectively handling the big-picture direction for the firm.

Given the large amounts of debt accrued at the brewer during their decade of acquisitions, Anheuser-Busch InBev’s focus has been on increasing FCF and streamlining operations to achieve margin expansion while simultaneously deleveraging their balance sheets.

In short, I still rate the firm as having a wide and robust economic moat.

To gain a more comprehensive understanding of Anheuser-Busch InBev’s economic moat and business structure, I recommend reading my two previous articles here and here.

While my original deep-dive does date back to October 2022, I believe my business analysis section still rings true in 2024 and may help generate a much more holistic understanding of how the brewer does their business.

Earnings Analysis – Q1 FY24 Update

Anheuser-Busch InBev reported their first quarter results for FY24 on May 8 with the brewer delivering a solid set of earnings to kick off the new fiscal year.

Total revenues increased 2.6% YoY thanks to strong performances by the brewer’s self-proclaimed “megabrands”. This included solid growth in sales of Stella Artois, Bud Light, and Corona with the latter leading sales growth, achieving a 15.5% YoY growth rate in international sales.

The continued strength of Anheuser-Busch InBev’s core mega brands suggests that their market relevance remains intact despite what seems like a shift in consumer tastes and preferences towards more fringe product offerings from smaller craft breweries.

Anheuser-Busch InBev continues to partner with leading sports and entertainment brands such as the NBA, NFL, UFC, and even Roland Garros to market their core beers. Such an advanced and broad level of marketing and consumer reach simply cannot be replicated by smaller breweries.

Nevertheless, total volume decreased 0.6% due to a 3.5% increase in non-beer volumes being unable to offset the 1.3% slide in beer volumes. The slight decrease in beer volumes came mostly due to a 10.1% drop in STW volumes in the U.S. market, which resulted in their North America segment being the only geographic region where Anheuser-Busch InBev didn’t achieve top-line growth.

This may be due to ongoing demand contraction in their core Bud Light brand which could still be suffering from the boycott which took place in the U.S. in 2023.

While Anheuser-Busch InBev has still not managed to grow their volumes meaningfully in North America, I still find it important to note that the entire segment saw a 1.2% increase in net revenue per HL.

This key metric of comparing revenues to total hectolitres brewed (“HL”) allows for a wonderful analysis of how the brewer’s “premiumization” strategy is working out.

Indeed, total revenues per HL grew a wonderful 3.3% YoY in Q1.

Such solid price performance came as Anheuser-Busch InBev continued to see strong demand – even in markets such as North America where volumes fell – due to an increased consumer preference for beer brands deemed “above core” at the brewer.

Leading this segment in the United States are the Stella Artois and Michelob Ultra brands.

The first quarter saw Anheuser-Busch InBev manage their COGS very efficiently with a 2.5% drop resulting in gross profits increasing 2.7% YoY. A similar management of SG&A expenses allowed Anheuser-Busch InBev’s normalized EBITDA margin to expand 90bp YoY to 34.3% with a total normalized EBITDA of $4.99 billion in Q1 FY24.

While Anheuser-Busch InBev is still struggling to achieve pre-COVID EBITDA margins of 40.3%, I believe a stronger economic environment accompanied by greater consumer confidence is needed to achieve such results again.

Total income attributable to shareholders increased a wonderful 60% YoY to $1.64 billion, which fundamentally illustrates the positive earnings surprise witnessed in Q1.

Seeking Alpha’s Quant continues to rate BUD as having an “A+” profitability rating which, I believe, is a good representation of their current situation. Anheuser-Busch InBev remains an economic powerhouse and their margin expansion in Q1 was very positive in my opinion.

Doukeris noted in the earnings call that they remain focused on managing their existing portfolio of debt with a new issuance of corporate bonds designed to improve their bond maturity profile.

I like the current maturity profile and see their overall debt profile as sustainable. Their current financial leverage ratio is just 2.68x which is nicely below my desired limit of 3x.

Management’s outlook for 2024 remained unchanged despite the solid quarter, with EBITDA growth of 4-8% still being forecast for the remainder of the year. I suppose the team at Anheuser-Busch InBev is in the process of managing expectations, with consensus beats being viewed as a better strategy than over-promising and under-delivering.

Overall, I saw Q1 as being a really positive period for the brewer. Improved margins, solid volumes despite weak consumer sentiment and an increasing amount of revenue per HL once again suggests that Anheuser-Busch InBev’s core business is firing on all cylinders.

Valuation

Seeking Alpha’s Quant rates BUD stock as having a “D” valuation letter grade at the present time. I believe that while the recent rally in share prices has reduced some upside potential for the brewer’s stock, the current letter grade is excessively pessimistic as it suggests an overvaluation in shares.

The current P/E GAAP TTM ratio of 28.05x is quite elevated and not immediately indicative of a deep-value situation. When combined with a pretty high EV/Sales ratio of 3.49x, it becomes clear why the quant provides such a pessimistic rating, especially in comparison to the averages seen in the consumer staples sector.

However, I still see the relatively low P/S TTM ratio of 2.21x as reasonable given the firm’s current profitability. I also see the P/CF TTM ratio of 9.77x as fair given how much FCF Anheuser-Busch InBev generates in any given fiscal period.

Reference to a Seeking Alpha 1Y Advanced Chart shows us that BUD stock has not performed all that well over the last year, with the brewer’s shares being outperformed by the popular S&P 500 tracking ETF SPY (SPY) to the tune of 20%.

Nevertheless, BUD shares have been trending positively over the past year as some of the worst market pessimism regarding the brewer’s brands and earnings appears to have worn off.

Next, I’ll use The Value Corner’s Intrinsic Valuation Calculation to obtain a better understanding of what value exists in the company from a quantitative perspective.

Using the current share price of $66.03, an analyst consensus estimated 2024 EPS of $3.55, a realistic long-term “r” value of 0.08 (8%), and the current Moody’s Seasoned AAA Corporate Bond Yield ratio of 5.28x, I derive a base-case IV of $72.50. This represents around a 9% undervaluation in shares given current prices.

To model a bear case, I used a CAGR value for r of 0.06 (6%) to represent how more muted annual growth may impact current valuations. In such a scenario, shares are valued at $61.00 representing a 9% overvaluation in the stock.

The 2024 consensus EPS estimate is in my opinion a fair and achievable figure for the brewer given their 2024 guidance and the $0.75 underlying EPS generated in Q1.

These valuation figures are quite similar to those calculated in September in my previous article. I would like to note however that I have reduced the base-case CAGR from 10% to 8% to reflect a generally more bearish consumer spending environment.

Nevertheless, as illustrated by both the current valuation metrics and the relatively high CAGR values, quite a significant amount of growth is already incorporated into the current share price. As a result of this, I suspect that any underachievement by Anheuser-Busch InBev in achieving their growth targets could place some downward pressure on shares.

This supports my earlier hypothesis that management appears to prefer overachieving relative to estimates, rather than being optimistic and underachieving.

As a result, I find it very difficult to make any short-term (1-12 month) predictions regarding the direction BUD stock may take, as I see too many unknown variables impacting the firm.

Nevertheless, I believe BUD is still well positioned to benefit from sustained long-term (1-5 years) tailwinds arising from their unrivalled portfolio of brands along with continued operational improvements.

Anheuser-Busch InBev Risk Profile

I do not believe the brewer has seen any material change in their risk profile compared to the last time I wrote about their company.

Anheuser-Busch InBev is of course still exposed to market risk, which arises from high levels of competition within the industry and supply-side challenges which could impact the brewer in the future.

Any further price inflation in the U.S. or European economies in particular could hurt Anheuser-Busch InBev’s profitability as higher COGS place pressure on operating margins.

Excellent performance by Anheuser-Busch InBev’s competitors accompanied by shifting consumer tastes and preferences could also reduce sales for the brewer’s core brands. This could significantly limit topline growth and potentially place a damper on growth even if bottom-line gains are made.

From an ESG perspective, I still see Anheuser-Busch InBev as making material progress towards achieving key environmental goals, such as their net-zero carbon initiative and reducing the amount of water required per HL of beer produced.

Overall, I rate the brewer as having a well-mitigated risk profile and do not see any particularly acute concerns facing the company. Of course, the topic of investment risk is very subjective, and I implore you to conduct your own research into the matter should it be of concern to you.

Summary

Anheuser-Busch InBev produced a great set of Q1 results which indicated that their brands continue to resonate with consumers while premiumization strategies are also generating tangible revenue growth as illustrated by an expanding revenue per HL metric.

While the firm is, of course, exposed to cyclical market forces and faces real competitive pressure from rival breweries, I believe Anheuser-Busch InBev continues to be proactively managing their portfolio of brands to ensure the correct distribution of products is being supplied to stores and consumers.

The recent rally in valuations has eliminated some upside potential in shares, with the current stock price essentially suggesting a fair valuation at the present time.

As a result of this fair valuation, I rate Anheuser-Busch InBev as being a Hold at the present time. While I cannot advocate for any further accrual of shares due to the current fair valuation not providing a sufficient margin of safety, I will be holding on to my significant position in the brewer. In the long term, I still believe the brewer is well-positioned to generate real shareholder value.