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Summary

  • BUD shares are nearing the $100 level, where they could be a good value.
  • The company is swimming in debt, which will hamper profitability in the future.
  • Earnings estimates are reasonable, making shares appear relatively cheap.

Anheuser-Busch Inbev (NYSE:BUD) is the brewing giant that was born out of the mega-merger in 2008 which brought the foreign rivals together. Inbev took on some $45 billion in debt to make the deal happen and in 2009, shares of the giant were listed in the US under their current ticker. Since that time shares have risen from $35 to $107, where they sit today, amid massive profit growth and nice dividends from the company. In light of this information, I thought it would be instructive to take a fresh look at BUD and see if the shares had run their course or if there was room to go higher.

To do this I'll use a DCF-type model you can read more about here. Basically, the model uses inputs such as earnings estimates, which I've sourced from Yahoo!, dividend estimates, which I've set at a standard 59% payout of the prior year's earnings, and a discount rate, which I've set as the 10 year Treasury rate plus a 6% equity risk premium. In setting these assumptions it is important to understand there is certain subjectivity and that all of these estimates are open for interpretation.

2013

2014

2015

2016

2017

2018

2019

Earnings Forecast

Prior Year earnings per share

$4.81

$5.33

$6.06

$6.61

$7.21

$7.87

x(1+Forecasted earnings growth)

10.80%

13.70%

9.10%

9.10%

9.10%

9.10%

=Forecasted earnings per share

$5.33

$6.06

$6.61

$7.21

$7.87

$8.59

Equity Book Value Forecasts

Equity book value at beginning of year

$32.15

$34.66

$37.57

$40.61

$43.92

$47.54

Earnings per share

$5.33

$6.06

$6.61

$7.21

$7.87

$8.59

-Dividends per share

$2.82

$3.14

$3.58

$3.90

$4.26

$4.64

=Equity book value at EOY

$32.15

$34.66

$37.57

$40.61

$43.92

$47.54

$51.48

Abnormal earnings

Equity book value at beginning of year

$32.15

$34.66

$37.57

$40.61

$43.92

$47.54

x Equity cost of capital

8.50%

8.50%

8.50%

8.50%

8.50%

8.50%

8.50%

=Normal earnings

$2.73

$2.95

$3.19

$3.45

$3.73

$4.04

Forecasted EPS

$5.33

$6.06

$6.61

$7.21

$7.87

$8.59

-Normal earnings

$2.73

$2.95

$3.19

$3.45

$3.73

$4.04

=Abnormal earnings

$2.60

$3.11

$3.42

$3.76

$4.14

$4.54

Valuation

Future abnormal earnings

$2.60

$3.11

$3.42

$3.76

$4.14

$4.54

x discount factor(0.085)

0.922

0.849

0.783

0.722

0.665

0.613

=Abnormal earnings disc to present

$2.39

$2.64

$2.68

$2.71

$2.75

$2.79

Abnormal earnings in year +6

$4.54

Assumed long-term growth rate

3.00%

Value of terminal year

$82.63

Estimated share price

Sum of discounted AE over horizon

$13.18

+PV of terminal year AE

$50.65

=PV of all AE

$63.82

+Current equity book value

$32.15

=Estimated current share price

$95.97

At first blush we see the current share price of $107 stands in stark contrast to the lower fair value my model is producing at $96. But before we jump in and start selling, let's first understand what's going on to produce that fair value.

The first thing we must understand is that this is not a target price, it is a fair value. It is saying that BUD shares are a buy at any price at or below $96 given the expectations I used above. Of course, we are $11 over that right now so my model would imply that BUD shares are overvalued on a fundamental basis. Are shares overvalued? Maybe. But we'll see that there are perhaps other forces at play here than simple fundamental valuation.

One thing I'd like to highlight in using this model with BUD that is much different from most $170 billion companies is the odd dividend policy. Since relisting after the merger BUD has paid out annual dividends in April, excluding last year when an interim dividend was also paid in October. This makes forecasting the company's future dividends quite challenging and the reason I've chosen 59% of earnings is that the dividend is based in part on the prior year's earnings. Thus, applying 59% times earnings for each year should get us close enough to what actual dividends are likely to be for this analysis. Of course, this is another area open for interpretation but we just need to be close for the purpose of this analysis.

BUD's business is obviously very strong. It is the dominant global brewer and its market positions with individual brands in the portfolio is unsurpassed. Nobody has any doubts that BUD is going to sell a lot of beer every year and as we know, it makes a lot of money on that beer. As a result, I won't spend a lot of time here going over the business as it is well known; you, the readers, are smart enough to know what BUD does so I won't waste your time.

What I would like to talk about a little bit is BUD's prodigious debt load. I mentioned that Inbev had to borrow $45 billion to make the deal happen and as a result, the combined company still carries an enormous amount of debt. At the end of last year BUD still had $45 billion in long term debt in addition to tens of billions of dollars of other obligations. This results in BUD's tangible book value plummeting to negative $49 billion. That is simply horrendous and while it isn't as important for BUD as some other businesses, it does mean that if the company is in need of liquidity for some reason, it may have to pay a higher price for it. I can't think of another company I've seen with that much negative tangible equity so just understand there is a lot of leverage going on here.

Building upon the negative tangible book value and why I didn't mention traditional book value, BUD has $70 billion of goodwill on its balance sheet. I've mentioned before in a few of my articles that I hate the idea of goodwill being stored on the balance sheet because it inflates the book value of a company. Goodwill is simply the amount of money a company pays over and above the fair value of the assets being received. In other words, when a buyout happens and the buyer pays a premium, it has to record the premium as goodwill.

Goodwill is pointless; you can't use it because it isn't a real asset and the only way the value ever changes is if it gets impaired. You can't raise the value of existing goodwill but GAAP requires regular reviews of goodwill for impairments. Thus, the only way we ever see goodwill affect a company's financials is if it gets written down. I caution investors to understand that such a massive amount of goodwill is likely to be impaired at some point and that these impairments will reduce GAAP earnings when they occur. I wouldn't mention it but goodwill is more than 40% of BUD's market cap so if impairments occur, they will be huge.

Overall I think BUD is a bit overvalued based upon its fundamentals but I also think the amount is relatively small. If BUD falls to the $100 mark I think it will find some buyers due to its market share, steady profits and large growth potential. In addition the company spins off a lot of cash that is being returned to shareholders via dividends and if dividend growth keeps pace with earnings in the coming years, we'll continue to see very high yields with BUD shares. I like BUD on a continuation of its pullback to the $100 area but you can get long here as well. It's a great company that will allow you to sleep well at night knowing your money is safe and paying you a high yield to be patient.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Anheuser-Busch Inbev Is Worth A Look On A Pullback