Anheuser-Busch InBev Looks Stuck, Moat Shrinking As Competition Rises

| About: Anheuser-Busch InBev (BUD)

Anheuser-Busch InBev (NYSE:BUD) is a brewing company that provides a wide range of beers to consumers around the world. Our price target analysis projects $100 as BUD's new price target with a Buy/Sell range from $79 to $110. Given BUD's current stock price around $96, we rate this company as a "Hold." Looking at the past fiscal year performance the company saw small increases in profitability margins, and given its current valuation we believe that its P/E shows fair value. We predict the company will continue to perform along with the market over the 2013 fiscal year. One of the catalysts that can spark modest growth is its merger with Grupo Modelo (OTCPK:GPMCF) that is set to be complete in June 2013. In all, we expect 2013 will be a moderately prosperous year for BUD with only 4% predicted growth, which leads us to a Hold rating for the company.


BUD is currently valued with a P/E at 21.9 and a future P/E of 17.9. BUD is valued higher than the industry average P/E of 18.9. We look for P/Es in the 20-25 range to indicate fair value, and BUD falls into this category. For the full 2012 fiscal year BUD has reported a 7.2% increase in revenue. Its EPS ended the year at $4.55, showing a 12.6% increase. We have to decide whether BUD will be able to sustain this growth and what its outlook is for 2013.

Looking at BUD's key ratios such as ROA, ROE, and ROIC in comparison with market competitors will give us a good idea of the company's performance vs. its competitors. BUD reports ROA of 6.2%, ROE of 18.4%, and ROIC of 6.2%. PepsiCo (NYSE:PEP), one of BUD's market competitors, reported ROA of 8.4%, ROE of 28.7%, and ROIC of 11.2%. Coca-Cola (NYSE:KO) reported ROA of 10.9%, ROE of 28.0%, and ROIC of 13.9%. BUD has the lowest percentages in each of these three key ratios, although it does have stable numbers.

BUD's decrease from current P/E to future P/E indicates the company is expected to see growth over the 2013 fiscal year. BUD is predicted to see -10.5% growth this quarter, -8.2% growth next quarter, and positive 4% growth over the full fiscal year. While the full year does project a small amount of positive growth, the next two quarters are not optimistic for BUD. This said, we believe that the future P/E overestimates the growth opportunity for BUD, and that the company will most likely stay the same or decrease in valuation -- which leads us to give this company a Hold rating.


BUD has announced a merger with another large brewer, Grupo Modelo. This merger has already begun to take place and is scheduled to be completed by June 2013. For the present, the company's next plan of action is to buy any outstanding shares of Grupo Modelo that BUD does not already own at $9.15 per share. In a presentation to investors, BUD explains that its motivation in merging is to invest in the Mexican market and take advantage of the growth opportunity from combining two leading brand portfolios and their distribution networks. BUD believes that this combined company will lead the global beer industry with $46.8 billion in potential revenue. While this merger will provide growth potential in the future, we've seen in the growth estimates that this will not take place in 2013.

Economic Moat

BUD is a large brewing company that offers 200 brands in over 100 countries worldwide. With this merger BUD will be expanding that number of brands and their international presence. The main issue with BUD's economic moat that used to seem impenetrable is the rise of the craft brewer. We see companies like Sam Adams, Dogfish Head, and so many more as posing a real threat to BUD. While the company can continue to acquire a large number of these craft brewers, the rate of growth is very strong. The variety of brands is really putting a damper on BUD, and it will hurt margins. BUD is currently the No. 1 or No. 2 brewer in 19 markets around the world, and is considered the leading global brewer. While BUD is becoming an even stronger and larger company in June 2013, when the merger with Grupo Modelo is complete, we do not see this as constituting an economic moat. Overall, we see BUD as having a fairly light economic moat with few barriers to entry for competing companies.

Revenue and EPS Outlook

The price target analysis for BUD breaks down what we predict for the next five fiscal years in terms of income and growth, as well as what that means for the stock price in 2013. Reflected in our first table is the 2012 operating income and then the decrease in 2013. The following price target was configured through a five-year projected discounted cash flow analysis. The model projects operating income, taxes, depreciation, capital expenditures, and changes in working capital. Using that information, we can project what the company is worth. We can then use that projection and compare it to current prices.

We anticipate a 2.9% increase in operating income YoY, after which the company will start to see a small decrease in growth. Going back to BUD's PE and future PE, we believe that these numbers are overestimating growth potential. A good PE range for a healthy company that is performing with the market is a 20-25 range. Currently BUD's EPS is 4.45. In order for BUD to maintain this healthy range either the company's stock price would have to dip to approximately $89, from the current $96, or EPS would have to increase to 4.8. Because BUD is forecast to perform alongside market trends, that's why we rate this company a Hold.

Price Target Analysis

The following price target was configured through a five-year projected discounted cash flow analysis. The model projects operating income, taxes, depreciation, capital expenditures, and changes in working capital. Using that information, we can project what the company is worth. We can then use that projection and compare it to current prices.

Here is how to calculate price targets using discounted cash flow analysis (all figures in millions):

Step 1: Project operating income, taxes, depreciation, capex, and working capital for five years. Calculate cash flow available by taking operating income - taxes + depreciation - capital expenditures - working capital.

2012 Projections

2013 Projections

2014 Projections

2015 Projections

2016 Projections

Operating Income


















Capital Expendit.






Working Capital






Available Cash Flow






Step 2: Calculate present value of available cash flow (PV factor of WACC * available cash flow). You can calculate WACC, but we have given this number to you. The PV factor of WACC is calculated by taking 1 / [(1 + WACC)^# of FY years away from current]. For example, 2016 would be 1 / [(1 + WACC)^4 (2016-2012).

WACC for BUD: 6.29%






PV Factor of WACC






PV of Available Cash Flow






Step 3: For the fifth year, we calculate a residual calculation. This number is calculated by taking the fifth year available cash flow and dividing by the cap rate, which is calculated by taking WACC and subtracting out residual growth rate. Residual growth rate is typically between 2% and 6%. Four percent is the average growth for the industry. Companies with high levels of growth have higher residual growth, while companies with lower growth levels have lower residual growth. This is why higher growth companies tend to have higher P/E ratios. We will give you the cap rate.

Cap Rate for BUD: 4.29%


Available Cash Flow


Divided by Cap Rate


Residual Value


Multiply by 2016 PV Factor


PV of Residual Value


Step 4: Calculate Equity Value - add PV of residual value, available cash flow PVs, current cash, and subtract debt:

Sum of Available Cash Flows


PV of Residual Value


Cash/Cash Equivalents


Interest Bearing Debt


Equity Value


Step 5: Divide equity value by shares outstanding:

Equity Value


Shares Outstanding


Price Target


Profit/Value Industry Comparisons


Q1-Q3 2012

Q1-Q3 2011

Operating Margin



Gross Margin



Return on Equity



BUD has slightly increased all of its profitability margins YoY. Its operating margin increased from 31.6% to 32.0%, gross margin increased from 57.4% to 58.6%, and ROE increased from 16.1% to 18.4%. How do these key ratios compare to competitors?

For the full fiscal year, KO increased its operating margin from 21.8% to 22.4% in 2011 to 2012. Its gross margin decreased from 60.9% to 60.3%, and its ROE increased from 27.4% to 28.0%. During the same period, PEP's operating margin decreased from 14.5% to 13.9%, gross margin decreased from 52.5% to 52.2%, and ROE decreased from 30.7% to 28.7%. Monster Beverage Corp.'s (NASDAQ:MNST) operating margin decreased from 26.8% to 26.7%, gross margin decreased from 52.5% to 51.7%, and ROE increased from 31.7% to 41.9% YoY. Dr. Pepper Snapple Group (NYSE:DPS) increased its operating margin from 17.3% to 18.2%, gross margin from 57.9% to 58.3%, and ROE from 25.7% to 27.7% YoY.



Industry Average




Future P/E



As discussed briefly earlier, we see that BUD's P/E at 21.9 is slightly higher than the industry average at 18.9, but it is fair valued. Its future P/E of 17.9 indicates a small amount of growth for 2013. Let's compare these numbers to its competitors. KO's current P/E is at 20.0 and its future P/E is 18.2. PEP's P/E is at 20.7 with a future P/E of 17.0. MNST has a current P/E of 29.7 and a future P/E of 20.6. DPS's P/E is at 15.9 and its future P/E is 14.2. BUD's current and future P/E follow how the rest of the market is projected to move.


What could go wrong in our argument? It is possible that BUD could see either a large amount of growth in 2013, causing it to outperform the market. As we've seen earlier, BUD is merging with Grupo Modelo, a move that could bring huge returns for the company. Although we do not anticipate BUD seeing the benefits of this move during the 2013 fiscal year, it is a potential variation. On the other hand, BUD could see drastic decreases in growth and underperform the market. Again, this merger could be a catalyst to this underperformance. If the merger does not go as planned or takes away from BUD's normal operations, the company could see reduced numbers. Although we do not believe either of these variations will happen, we recognize them as remote possibilities.

The Bottom Line

In conclusion, we see that BUD is currently a fair valued company with evidence to suggest that it will perform along with market trends in the next six to 12 months. Its merger with Grupo Modelo will provide opportunity for growth, although we do not expect to see that grow immediately. Although there are slight possibilities for BUD to either underperform or overperform the market in the current fiscal year, we believe that neither of these situations will happen. In all, BUD's current fair value and its modest 4% projected growth for the 2013 fiscal year leads us to rate this company as a Hold.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The Oxen Group is a team of analysts. This article was written by David Ristau, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.

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