The November 2008 merger of Anheuser-Busch and InBev created AB- InBev (NYSE:BUD). It's been a major success so far. EPS climbed from $2.90 in 2008 to $3.65 in 2011. The year ending December is now forecast to come in at a new record of about $4.69 per share.
The 2010 annual dividend of $0.50 has more than tripled to $1.56. AB-InBev's very good numbers came despite a global trend away from beer and back towards hard liquor and wine.
A merger with Mexico's Grupo Modelo has been agreed upon. The scheduled closing date is expected in Q1 of 2013. This will extend BUD's already market-leading share even further.
(click to enlarge)
Data: AB-InBev 2011 annual report
Investors have noticed. BUD's share price has run up more than 80% from the 2011 low (from $49.10 to $88.50). If you were smart, or lucky enough, to own these shares should you be buying more, holding or selling?
Sources: BigCharts, Value Line
Today's valuation of 18.9x 2012 projections with a 1.76% dividend yield is not cheap. Buyers at the 2010 and 2011 bottoms were able to establish positions at 12.7x and 13.5x earnings. Momentum traders who got in at much higher valuations later in 2010 eventually made money, but by paying too much they were forced to suffer through 18-months of sometimes large paper losses to do so.
Competitor Molson Coors (NYSE:TAP) has been trading in its present configuration since February 2005. Pro-forma EPS grew from $1.95 that first year to $3.63 in 2011. This year's Zacks estimate now runs $3.92. TAP's average P/E over the seven years 2005 through 2011 equaled 14.8x (source: Value Line). As the #1 player in beer BUD averaged a higher 17.6 multiple from 2009 - 2011.
If BUD were to regress back to that normalized P/E and hit its 2013 consensus estimate of $5.15, the 16-month target price becomes $90.64. That goal is only 2.4% above this morning's quote. Morningstar is less sanguine than that. They rate BUD with just 2-stars (out of 5) and see present day fair value as $70.
With a lot of good news already built into the price, I'd recommend taking profits on BUD shares. Those bullish on BUD's prospects should get a chance to buy back in at a much lower price sometime in the reasonable future.
AB-InBev is a very good company at a somewhat overpriced valuation.