10/30/2019
Anheuser Busch Inbev NV NYSE: BUD
Alcohol stocks are an interesting commodity because, while non-essential, they can perform similar to an essential in downtimes however consumption increases in up times. So there is, in theory, some mitigation of downside risk with some upside potential. Everyone knows or believes this, so they are typically overvalued in my opinion. BUD dropped more than 10% this week though, so I decided to take a look.
Price at write-up $80.88 (-14.27%, -8.03%, 8.14%)
Indexes (30, 180, 365 day)
VIX: 12.55 (16.61, 13.12, 19.51)
TED: 32 (34, 20, 25)
S&P500: 3047.62 (2.89%, 3.55%, 15.39)
Valuation Ratios
Target: $87
I haven't covered BUD in a while and never completely (I first covered in a beer stock round up in 2014, in 2015 in a portfolio rundown where I wondered "WTF InBev is doing", and notably as an aside in my 2018 piece on ATVI and the gaming industry). So here's the full treatment.
As stated in the ATVI article noted above, instead of personally innovating they've just been buying the innovators. A solid strategy as long as you can keep doing it and the innovators keep innovating. Unlike ATVI they haven't been shutting down a lot of brands, seemingly just consolidating and diversifying.
Anheuser-Busch InBev was founded in 2008 when Anheuser-Busch (1852) was acquired by InBev (the company founded by the merger of Interbrew of Belgium and AmBev of Brazil in 2004). BUD is the US ADR of ABI so I'll just refer to the whole group of acquired companies as BUD even though ABI is more technically correct. BUD bought Grupo Modelo (leading brewer in Mexico) in June 2013 for $20.1B and sold Grupo Modelo's North American brand rights to Constellation Brands (STZ), notably including Corona. To keep the consolidation going BUD purchased SABMiller in October of 2016 and in the process sold the SABMiller's Coors line (back) to Molson Coors, Coca-cola bottling and distribution to KO, and much of it's European brands to Asahi Breweries. I don't think it would be permissible (under US anti-trust laws) or advisable for BUD to continue consolidation strategies and it has instead focused on diversifying.
A quick look at some notables from BUD's largish portfolio of brands: Stella, the Budweisers, Becks, Hoegaarden, Michelob, Bass, rolling rock, shock top, Spaten, Löwenbräu, Busch, Franziskaner, and most notably to me as a beer lover: Elysian Brewing Company (2015), Devils Backbone Brewing Company (2016), Goose Island (2011), and Wicked Weed Brewing (2017).
At a basic level, all these craft breweries needed a cash injection either to stay in business or expand and sold themselves to BUD. These beers are more widely available due to BUDs distribution network, are theoretically brewed with the same dedication and possibly brewers, with enough volume to see sales almost coast to coast. Giving BUD some much-needed exposure to Craft beer which, for our purposes, simply means flavorful innovative beer while increasing distribution availability for consumers. But, the volumes are still pretty low unlike the worldwide distribution and production of Corona.
BUD is expanding brewing of Corona outside of Mexico using Mexican brewers, presumably familiar with the specific process, throughout the world. Corona had 21.1% revenue growth outside of Mexico (STZ still owns North American Distribution) most notably in China, with the new local Corona brewers in certain markets to meet demand and quality as Corona's iconic bottles are made for show and horrible at transit and lasting in displays.
In the Asian Market, where Budweiser is considered a premium product, BUD sold off a minority stake of it's Asia Pacific Business as a listing in the Hong Kong market for $7.75B, an "IPO" that broke records there.
Meanwhile, the American market has exploded with Hard Selzer where BUD had no offerings, having only recently introduced "Natty Light Seltzer" as a value brand (where there are few alternatives) before it launches it's own premium brands (Bud Light Seltzer 2020, etc) to compete directly. They are being reasonably quick about it, but may miss the mark even if they take their time.
All this means that acquisitions and global expansion have resulted in geographic diversity with 10 countries making up 80% of EBITDA (5 in 2015) with Carlos Brito claiming "Emerging markets now make up roughly 70% of our volumes." However, this has increased currency exchange volatility and debt issuance troubles.
My Thoughts
It's possible Seltzer is the new craft for people who drink Vodka soda. It's possible this will be as popular as Zima. And while I mostly know beer & spirit drinkers, who hate the Hard Seltzers on offer, I believe they aren't the target audience and there is likely significant growth in the Vodka soda market segment that will grow the alcoholic beverage sales for traditional sellers of low ABV beverages at the cost of the high ABV beverage manufacturers by the degree that Vodka soda drinkers currently use them for Vodka sodas but with additional market for convenience. Convenience market and young drinkers, in particular, seem to resonate with the Hard Seltzer products and currently have no other alternative to Vodka sodas which Hard Seltzers can easily outcompete. . . unless and until the Spirit makers introduce their own Hard Seltzer lines, which they should and likely will, though I haven't heard about such movements yet. Knowing people in the industry, I believe they will be reluctant to do this and in the meantime "Bud Light Seltzer" will likely have time to establish itself both because of inclination and the existing infrastructure BUD possesses for the creation and distribution.
As mentioned in the intro, the alcohol market has generally been able to meet inflation with price increases after some lag and in good times, better them. BUD has had some issue with raising prices faster than local competition in South Korea and Brazil, presumably stemming from the fact it is a multi-national contending with domestic/local producers, however, this should simply create more volatility in those local markets as all must ultimately bow to market forces on both the consumer and production sides.
Anheuser Busch Inbev NV NYSE: BUD
Alcohol stocks are an interesting commodity because, while non-essential, they can perform similar to an essential in downtimes however consumption increases in up times. So there is, in theory, some mitigation of downside risk with some upside potential. Everyone knows or believes this, so they are typically overvalued in my opinion. BUD dropped more than 10% this week though, so I decided to take a look.
Price at write-up $80.88 (-14.27%, -8.03%, 8.14%)
Indexes (30, 180, 365 day)
VIX: 12.55 (16.61, 13.12, 19.51)
TED: 32 (34, 20, 25)
S&P500: 3047.62 (2.89%, 3.55%, 15.39)
Valuation Ratios
| Price/Earnings (TTM) | 17.09x |
| Price/Sales (TTM) | 2.5x |
| Earnings per share | 4.70 |
| Price/Book (MRQ) | 2.55x |
| Price/Cash Flow (TTM) | 9.39x |
| Held by institutions | 4.25% |
| Short interest | 0.73% |
| Dividend | 2.53% |
| MarketCap | $158.5B |
| Beta | 1.2 |
Target: $87
I haven't covered BUD in a while and never completely (I first covered in a beer stock round up in 2014, in 2015 in a portfolio rundown where I wondered "WTF InBev is doing", and notably as an aside in my 2018 piece on ATVI and the gaming industry). So here's the full treatment.
As stated in the ATVI article noted above, instead of personally innovating they've just been buying the innovators. A solid strategy as long as you can keep doing it and the innovators keep innovating. Unlike ATVI they haven't been shutting down a lot of brands, seemingly just consolidating and diversifying.
Anheuser-Busch InBev was founded in 2008 when Anheuser-Busch (1852) was acquired by InBev (the company founded by the merger of Interbrew of Belgium and AmBev of Brazil in 2004). BUD is the US ADR of ABI so I'll just refer to the whole group of acquired companies as BUD even though ABI is more technically correct. BUD bought Grupo Modelo (leading brewer in Mexico) in June 2013 for $20.1B and sold Grupo Modelo's North American brand rights to Constellation Brands (STZ), notably including Corona. To keep the consolidation going BUD purchased SABMiller in October of 2016 and in the process sold the SABMiller's Coors line (back) to Molson Coors, Coca-cola bottling and distribution to KO, and much of it's European brands to Asahi Breweries. I don't think it would be permissible (under US anti-trust laws) or advisable for BUD to continue consolidation strategies and it has instead focused on diversifying.
A quick look at some notables from BUD's largish portfolio of brands: Stella, the Budweisers, Becks, Hoegaarden, Michelob, Bass, rolling rock, shock top, Spaten, Löwenbräu, Busch, Franziskaner, and most notably to me as a beer lover: Elysian Brewing Company (2015), Devils Backbone Brewing Company (2016), Goose Island (2011), and Wicked Weed Brewing (2017).
At a basic level, all these craft breweries needed a cash injection either to stay in business or expand and sold themselves to BUD. These beers are more widely available due to BUDs distribution network, are theoretically brewed with the same dedication and possibly brewers, with enough volume to see sales almost coast to coast. Giving BUD some much-needed exposure to Craft beer which, for our purposes, simply means flavorful innovative beer while increasing distribution availability for consumers. But, the volumes are still pretty low unlike the worldwide distribution and production of Corona.
BUD is expanding brewing of Corona outside of Mexico using Mexican brewers, presumably familiar with the specific process, throughout the world. Corona had 21.1% revenue growth outside of Mexico (STZ still owns North American Distribution) most notably in China, with the new local Corona brewers in certain markets to meet demand and quality as Corona's iconic bottles are made for show and horrible at transit and lasting in displays.
In the Asian Market, where Budweiser is considered a premium product, BUD sold off a minority stake of it's Asia Pacific Business as a listing in the Hong Kong market for $7.75B, an "IPO" that broke records there.
Meanwhile, the American market has exploded with Hard Selzer where BUD had no offerings, having only recently introduced "Natty Light Seltzer" as a value brand (where there are few alternatives) before it launches it's own premium brands (Bud Light Seltzer 2020, etc) to compete directly. They are being reasonably quick about it, but may miss the mark even if they take their time.
All this means that acquisitions and global expansion have resulted in geographic diversity with 10 countries making up 80% of EBITDA (5 in 2015) with Carlos Brito claiming "Emerging markets now make up roughly 70% of our volumes." However, this has increased currency exchange volatility and debt issuance troubles.
My Thoughts
It's possible Seltzer is the new craft for people who drink Vodka soda. It's possible this will be as popular as Zima. And while I mostly know beer & spirit drinkers, who hate the Hard Seltzers on offer, I believe they aren't the target audience and there is likely significant growth in the Vodka soda market segment that will grow the alcoholic beverage sales for traditional sellers of low ABV beverages at the cost of the high ABV beverage manufacturers by the degree that Vodka soda drinkers currently use them for Vodka sodas but with additional market for convenience. Convenience market and young drinkers, in particular, seem to resonate with the Hard Seltzer products and currently have no other alternative to Vodka sodas which Hard Seltzers can easily outcompete. . . unless and until the Spirit makers introduce their own Hard Seltzer lines, which they should and likely will, though I haven't heard about such movements yet. Knowing people in the industry, I believe they will be reluctant to do this and in the meantime "Bud Light Seltzer" will likely have time to establish itself both because of inclination and the existing infrastructure BUD possesses for the creation and distribution.
As mentioned in the intro, the alcohol market has generally been able to meet inflation with price increases after some lag and in good times, better them. BUD has had some issue with raising prices faster than local competition in South Korea and Brazil, presumably stemming from the fact it is a multi-national contending with domestic/local producers, however, this should simply create more volatility in those local markets as all must ultimately bow to market forces on both the consumer and production sides.
Risks
Significant currency risk remains as a large part of BUD's portfolio is in weaker currency markets with greater currency risk, as a result, BUD has stuck to debt from the EU, Canada, U.S. which will be fine until the relative value of the income servicing that debt falls against the denomination of countries issuing that debt.
The plan of buying innovators and allowing them to innovate only works as long as you hold true to that philosophy and can continue to buy innovators while earning with those you've already purchased without diluting the product. It's pretty hard to do. So far, however, BUD, has a pretty good track record of doing it. But this strategy will always lag the general market, perhaps well illustrated in the lack of a Seltzer product and generally buying Crafter breweries that are well established. BUD isn't taking the risks it needs to lead the market, so it will always be left behind buying the winners - great on many levels, just not the fun ones.
Conclusion
I don't think I'm a buyer above 75, and to counter all that risk I'd prefer to pick it up at about $70.80. But people covet alcohol stocks, possibly because people love alcohol, and even after a 21% drop over the past 3 months I just think it's overvalued for all the same reasons ATVI probably is. They are a commodity business, buying other commodity businesses right after they've created a great product. So a small stake, as a commodity, might not be a terrible idea over the long term. But I'd prefer to sell a put in the 70s or sell a covered option in the 90s.
It is a possible Dip and flip target, but the relative valuation is a little high and I have some reasonable concerns about BUDs future. However, there's significant downside risk even at 78-80. Even a taste seems a bit much at this price as I don't think it will return to the median in the next 3 months. So perhaps that relegates me to options.
Due Diligence - STZ, ABEV
Significant currency risk remains as a large part of BUD's portfolio is in weaker currency markets with greater currency risk, as a result, BUD has stuck to debt from the EU, Canada, U.S. which will be fine until the relative value of the income servicing that debt falls against the denomination of countries issuing that debt.
The plan of buying innovators and allowing them to innovate only works as long as you hold true to that philosophy and can continue to buy innovators while earning with those you've already purchased without diluting the product. It's pretty hard to do. So far, however, BUD, has a pretty good track record of doing it. But this strategy will always lag the general market, perhaps well illustrated in the lack of a Seltzer product and generally buying Crafter breweries that are well established. BUD isn't taking the risks it needs to lead the market, so it will always be left behind buying the winners - great on many levels, just not the fun ones.
Conclusion
I don't think I'm a buyer above 75, and to counter all that risk I'd prefer to pick it up at about $70.80. But people covet alcohol stocks, possibly because people love alcohol, and even after a 21% drop over the past 3 months I just think it's overvalued for all the same reasons ATVI probably is. They are a commodity business, buying other commodity businesses right after they've created a great product. So a small stake, as a commodity, might not be a terrible idea over the long term. But I'd prefer to sell a put in the 70s or sell a covered option in the 90s.
It is a possible Dip and flip target, but the relative valuation is a little high and I have some reasonable concerns about BUDs future. However, there's significant downside risk even at 78-80. Even a taste seems a bit much at this price as I don't think it will return to the median in the next 3 months. So perhaps that relegates me to options.
Due Diligence - STZ, ABEV
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