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Federico Flom
Federico Flom
Articles (110) 

Anheuser-Busch Inbev (BUD) – Warren Buffett-Like Business

November 22, 2011 | About:

ABInBev (NYSE:BUD) is a human dynamo in the beer market and its force is worth facing. It is the largest brewer in the world and has become so thanks to its scale cost-cutting management team and its culture of cutting expenses, increasing share value and superseding competition.

Its acquisition of Anheuser-Busch has enabled the firm to increase in size and thus outspend, outsell and out-market any beer company.

Its watchword is “Be the best beer company in a better world.” And it is definitely achieving its goal.

Every year it is seeking to improve volume, increase revenue and keep costs below inflation. For such purpose, it is not only making great efforts in developed markets, but it is also rapidly expanding into emerging ones.

Its portfolio is made up of ordinary brands and premium brands, which enable it to reach the whole spectrum of consumers. To be more specific, it includes four of the world's top-10 beer brands with the largest shares in the Brazilian, Argentinean, American and Canadian markets (70%, 76%, 48% and 41% share, respectively).

This situation should enable ABInBey to pass from a single-digit growth to a double-digit increase.

As I have mentioned, the company's growth has been largely encouraged by its management. The firm's managers are extremely focused on cutting costs and building a bottom-line incentive structure. Shareholders are valuable for management too.

A significant part of the company's senior management comprises the Brazilian team, which bought Brahma, merged with Antarctiva to form AmBey and then merged with Interbrew, thus creating InBey.

The merger with Anheuser-Busch has brought problems, but this team is accustomed to dealing with nuisances.

In a nutshell, ABInBev is very well operated.

This is not all, however. To really see how the company is doing in the market, it is worth analyzing the last quarter results.

First of all, third-quarter earnings have exceeded expectations and efficiency gains have led to higher margins.

ABInBey has been able to achieve the targeted debt level and it is considered that the free cash flow will be used to pay dividends.

Its strategy to make consumers turn to its Four Brands will bring higher-margin products and growth in volume.

Now, let's turn to the specific.

Let's start with Budweiser. In the quarter it has undergone a 6.9% increase and the company has confirmed that the beer brand has renewed its agreement with FIFA, thus becoming the 2018 and 2022 World Cup Tournaments sponsor. That is not all. In the third quarter it has grown by 3.6% and by 4% on a per-hectoliter basis. Sales have achieved a 3.2% increase and EBIDTA grew by 12.2% in nominal terms and 5.5% organically, while its margin expanded by 71 basis points year over year to 38.8%.

I really like this brand. It is making great progress and it is becoming very well known across the Globe.

Now, I'll move to the markets. The U.S. market is the largest beer profit pool. Cost synergies total $2.25 billion and the EBIDTA margin has risen over 40%. Not bad at all, especially in a difficult economic environment.

What about Brazil? Management is seeking to focus on revenue rather than volume growth. One member of the board of directors has mentioned that performance remains strong and that revenue per hectoliter has increased by 8.4% due to a rise in prices. He also added that despite that they have lost market share in the fourth quarter that has increased the price gap with competitors, the company has gained 150 basis points of share.

I believe the company does not have to worry about this gap. It has a strong presence in the market with its focus brands – Skol, Brahma and Antarctica and Stella Artois, the premium brand, is growing fast, over 200%.

Brazil is a very profitable sphere.

Finally, let's turn to China. The Chinese market has shown significant per capita growth opportunities, a long-term margin and potential. The volumes of beer have risen by 4.7% with Budweiser, Harbin and Sedrin.

In terms of the premium segment, Budweiser is the leader. However, the company has also launched Stella Artois, particularly with the focus on Shanghai, Beijing and Xiango.

I highly appreciate the company's efforts and the initiatives it has launched in such emerging markets. It is very interesting how it is trying to expand its footprint. This definitely ensures success.

I believe these moves are pushing a significant upward trend for the company. Indeed, I would bet on it and its operations.

The company expects to raise revenue by 8%, and expand the gross margin in 40 basis points. This expansion has been triggered by cost savings and synergies.

Management considers that the EBIT margin will reach a 31.4% average in a five-year period and that the ROE will increase over 10%. Moreover, the acquisitions are expected to generate an average 22% return on invested capital.

When it comes to valuation, as we can see in the table, BUD is trading in multiples below industry averages (source: Factset) but higher than S&P 500 average multiples, which I consider appropriate given that BUD operates in a low-risk segment and deserves a premium valuation due to its brand, management and diversification.


The forward valuation of BUD is more interesting, with a forward P/E of 14.4 and a PEG ratio of 1.4. I think at the current levels, BUD is not a “cheap” stock but also is not expensive.

To sum up, the stock offers several positives:

  • Strong moat: brand, distribution chain, production all over the world, etc.

  • Predictable business: selling beer and alcohol beverages is quite “recession proof” and predictable

  • Not expensive valuation: given a forward p/e of 14 and a current P/S and P/B of 2.5 and 2.6, the stock is not trading at expensive valuations.

  • Proven management

  • Emerging markets growth

  • Solid balance sheet with low debt

About the author:

Federico Flom
Equity Research Analyst

Rating: 3.4/5 (13 votes)


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