Anheuser-Busch InBev: Though The Boycott Has Eased, It Is Still Overvalued

seekingalpha06-14

Anheuser-Busch InBev has had a troubled year.Previous coverage gave a "Sell" rating, with the company underperforming the market by 36% since then.The stock has become cheaper but is still trading at ...

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While recent results have been improving, the company does nevertheless not look especially strong right here. With its low yield, Anheuser-Busch InBev is not especially attractive at current prices, I believe. Past Coverage  I have covered Anheuser-Busch InBev several times here on Seeking Alpha, most recently in April 2023, a little more than a year ago. I called the company a risky investment back then and gave AB InBev a \"Sell\" rating. Since that article was published, Anheuser-Busch InBev has underperformed the market by a hefty 36%, dropping 5% while the S&P 500 (SPY) rose 31% over the same time frame. In today's article, I will update my thesis, accounting for recent results and the now somewhat lower valuation. Anheuser-Busch InBev: The Bud Light Hit   Around a year ago, Anheuser-Busch InBev made the news with an ad campaign for one of its brands, Bud Light, that wasn't well-received by many of the company's customers. A boycott began, and sales volumes for AB InBev's Bud Light brand started to decline. In many other cases, boycotts became less severe over time, as consumers either forget about the boycott, or they see it as less important as time passes and begin, once again, to shop the items that they boycotted for some time. Anheuser-Busch InBev has, at least so far, not seen a major recovery from the boycott. Recent results show that Bud Light sales are still down considerably compared to where they were before the failed ad campaign: Bud Light sales (Yahoo finance / Bump Williams Consulting) The decline of around 28% is still substantial, although marginally better compared to the result towards the end of 2023. It is worth noting that some other brands, such as Busch Light and Michelob Ultra, have reported small sales volume declines in the year-to-date period as well, although other light beer brands, such as Coors Light from Molson Coors Beverage Company (TAP) are performing nicely, likely in part due to the fact that some previous Bud Light drinkers have switched to different brands. Even if the lost customers were to never come back, the boycott will be lapped from now on. While sales may remain down in absolute terms, the Q2 and later results should not show a meaningful relative decline any longer due to this base effect. I thus believe that Anheuser-Busch InBev should be able to report an improved sales volume performance for the current quarter and during the second half of the year -- at least as long as the beer market, overall, continues to remain intact. Bud Light is only one brand out of Anheuser-Busch InBev's portfolio, and many other brands did way better than Bud Light in recent quarters, even while Bud Light was negatively impacted by the aforementioned boycott. The boycott also was mostly concentrated on the US, meaning the brand's performance in other markets wasn't as bad. Overall, AB InBev's results were thus not too bad in the most recent quarter. Overall company-wide sales volumes in the US were down, mainly due to the Bud Light boycott, but the company benefitted from higher sales volumes in non-US markets such as the Middle Americas, South America, Africa, and Europe. While the boycott still has a negative impact on AB InBev, the company's good diversification, both geographically and when it comes to its many different brands, lessens the impact of the boycott drastically. Overall, company-wide sales volumes were down by 0.6% during the most recent quarter. The company also increased its prices compared to one year earlier, which was enough to create a small revenue increase of 2%, relative to one year earlier. While this isn't super-strong growth, it is good to see that the company managed to generate at least some business growth despite ongoing headwinds. During the previous quarter, revenues were down 1% on a year-over-year basis, thus Q1 also was a sequential improvement. It is expected that results will continue to improve throughout the coming quarters, as we can see in the following table showing the analyst consensus estimates for Q2 to Q1 2025: AB InBev sales estimates (Seeking Alpha) To me, this seems like a reasonable estimate. With the beginning of the boycott being lapped, comparisons should get easier, meaning relative revenue growth should benefit, all else equal. It is also worth noting that the second and third quarters should benefit from two major sporting events: Starting this weekend, the European soccer championship (\"EURO 2024\") will begin, while the summer Olympics in Paris will begin six weeks from now. Consumption of beer will naturally also depend on factors such as the weather and which teams are doing well (or not), but overall, major sporting events are a tailwind for beer consumption. With its large portfolio of different brands, AB InBev has a good chance to benefit from these two large summer sporting events, I believe. When it comes to profitability, Anheuser-Busch InBev saw its EBITDA grow by around 5% during the most recent quarter, which is a very solid growth rate for a consumer staples stock such as AB InBev. The fact that EBITDA growth was stronger than the revenue growth that the company generated is also positive. The company states that the margin expansion was made possible by a combination of a shift in its product mix and by disciplined cost management, e.g. in overhead. This is good news, as tight cost controls can create value for shareholders when a company keeps growing its business while making sure that expenses are growing at a below-average pace -- the ensuing operating leverage results in profits growing faster compared to revenues. Earnings per share growth during the most recent quarter was attractive, at 16%, benefitting from higher revenues, although it is worth mentioning that the comparison to the previous year's quarter wasn't hard. Is BUD A Good Investment?  In my most recent article on Anheuser-Busch InBev, I called the company a Sell, due to a high valuation and the headwinds from the Bud Light boycott. With the boycott being lapped now, and with shares being down since my last article, AB InBev does not look as bad any longer. At current prices, Anheuser-Busch InBev is trading for 18x this year's expected net profits. This is better than the 20x net earnings multiple AB InBev traded at one year ago, although it is worth mentioning that AB InBev is still not the cheapest beer company by far. Competitor Heineken N.V. (OTCQX:HEINY) trades for just 13x forward net earnings, for example, while Molson Coors Beverage Company trades at a very low 9x this year's net earnings. On a relative basis, AB InBev is thus far from cheap and still trades at a premium compared to some of its peers in the beer industry. The dividend yield, at 1.5%, is not enough to make AB InBev into an attractive income stock, I believe. While the company offered higher dividends not too long ago and might get back to offering a significantly higher payout again in the future, the dividend is not a major plus today. Its peers Heineken and Molson Coors offer higher dividend yields, which is explainable by the fact that they trade at lower valuations, which makes the dividend yield rise, all else equal. Overall, I give AB InBev a Neutral or Hold rating today. Things look better than they did a year ago and the stock is cheaper now, both in absolute terms (stock price) and in relative terms (valuation). The big sporting events this summer could also be a tailwind for the company and the entire industry. But AB InBev still trades at substantially higher valuations compared to some of its peers, which is why I believe that those seeking exposure to the beer industry may be better off buying one of BUD's competitors.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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