Anheuser-Busch InBev: Back On Its Way To The Top?

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About: Anheuser-Busch InBev SA/NV (BUD)
by: The European Investor
Summary

AB InBev has hit a record low: the stock ended 2016 in a -13.9% loss.

The company suffers from low earnings and troubles in emerging markets.

Will the stock recover or is it now correctly valued?

Reasoning behind the price drop

It is clear that Anheuser-Busch InBev (NYSE:BUD), the biggest brewer in the world, has hit a bump in the road in 2016. The stock traded flat throughout last year and subsequently hit a 22-month low in December 2016.

The company previously took over the second largest brewer, SABMiller, for $103 billion. It promised to gain $1.4 billion of synergy advantages per annum, sprouting from this deal alone. On October 11, 2016, the company finalized the deal and incorporated all of the assets from SABMiller. This makes AB InBev (now SAB InBev) one of the 20 biggest companies in the world.

However, shareholders could not appreciate the meager third-quarter results that were released shortly after the deal. This led to the biggest price drop AB InBev has had to endure in years. Although revenue was up 2.8% for the third quarter, operational cash flow decreased 2%. It was the sixth consequential quarter in which InBev missed its profit estimates.

Anheuser-Busch eventually ended 2016 with a 13.9% loss.

Ready for recovery?

The forecasts for Q4 are just as pessimistic, as Trump's election made the Mexican peso drop 1/5th of its value. This has negative consequences for AB InBev, which gains about 11% of its cash flow from its Mexican brand Corona. Also, Brazilian sales dropped significantly over the last 12 months. InBev's growth in the country has declined from 12% in 2015 to as low as -5% in 2016.

Since November 2016, however, the stock has shown to be recovering slightly (up 5.54% since its lowest point). Even though its flagship brand Bud light lost 1% of its market share last year, investors do see some positivity in the acquisition of SABMiller. The takeover is supposed to boost InBev's global sales, while it will be very useful to cut costs at the same time. It seems like the last month, markets have come to this realization as well.

Also, insider trading shows a lot of positive signals. Only one month ago, Alexandre Van Damme, the biggest stock holder and member of the founding family of AB InBev, increased his position with 105 million euro worth of shares. With the biggest stakeholder being bullish on his own company, this only further increased positive market sentiment by the end of 2016.

Furthermore, Felipe Dutra, AB InBev's CFO, announced in a trader call that the dividend will most likely not be cut below 1.6 euro per share in the near term, which makes the company a very attractive stock.

Conclusion

It seems like last year's drop in price was mainly caused by AB InBev missing its estimates. The main reason for this bad performance is the takeover of SABMiller which cost a lot of money and effort for the company.

However, investors are starting to see that the worst is over and that the acquisition of SABMiller can be a good thing. It makes AB InBev one of the biggest companies in the world, and might lead to a lot of cost advantages in the (near)future. While market sentiment was low in the first 11 months of 2016, there seems to be a change on the way for the brewing giant in 2017.

I too believe that AB InBev trades at a far too low price for what it is worth. Now that the takeover of SABMiller is over, InBev can start focusing on getting its revenue back on track.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.