AB InBev: Overbought And Overvalued

| About: Anheuser-Busch InBev (BUD)

Summary

Craft beers and microbreweries are a serious threat to AB InBev profitability.

The company may be holding too much leverage if business plans for the SABMiller merger prove optimistic.

The stock quote appears to be overbought over the short-run, while underperforming over the long-run.

BUD's stock valuation may be excessively high, based on a slow/no growth operating future.

The latest bump higher in price during May for Anheuser-Busch InBev (NYSE:BUD) looks to be a great area to sell the stock. The equity quote has risen close to 10% since my last bearish article on the company in February. I explained the negative impacts to shareholder value of expanding competition in the beer industry, a stronger U.S. dollar, the prospect for slowing global trade, and BUD's enormous debt/liability load.

In a nutshell, younger consumer acceptance of and preference for local craft brewers in America will completely box in future price increases for national beer brands. The number of craft beer and microbreweries in America has exploded to a record competitive environment above 3,000 during 2017, according to the Brewers Association. AB InBev before the SABMiller purchase last year actually witnessed a drop in volumes sold across much of the world in 2016 vs. 2015.

Too much debt?

If the company is not allowed to raise prices, like it has in the past, the rising cost of servicing its debt may hold back or even shrink reported income in coming years. At the end of December, the company listed $122 billion in total debt and $177 billion in total liabilities vs. just $77 billion in tangible assets. In other words, if the company went out of business tomorrow and sold all its legitimate assets at accounting market value, the company would still OWE others about $100 BILLION in debt, wages, and contracted promises of repayment. Anheuser-Busch InBev held a $181 billion mountain of goodwill and intangibles mainly to account for acquisition premiums in excess of underlying assets. The SABMiller purchase last year appears to be a high-stakes gamble that management can increase sales volumes to make up for the upfront price paid.

This is what management communicated about potential harm to the operating business from its excessive debt level on page 5 of the latest 20-F filing with the SEC:

Our continued increased level of debt could have significant consequences, including:

increasing our vulnerability to general adverse economic and industry conditions;

limiting our ability to fund future working capital and capital expenditures, to engage in future acquisitions or development activities or to otherwise realize the value of our assets and opportunities fully;

limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

impairing our ability to obtain additional financing in the future, or requiring us to obtain financing involving restrictive covenants;

requiring us to issue additional equity (possibly under unfavorable conditions), which could dilute our existing shareholders' equity;

and placing us at a competitive disadvantage compared to our competitors that have less debt.

Momentum Considerations

During May, AB InBev has reached a clear overbought condition using a traditional calculation of the Relative Strength Index (RSI), where the latest price rise appears unsustainable for the next several months or longer. I have circled in green the overbought readings of a few days ago on the chart below. In addition, Thursday's action may have created a dreaded island reversal pattern on the daily charts, where the price gaps up, then gaps down after a short period trading at higher levels. I have circled this situation in red.

My momentum argument is based on the long-term underperformance for AB InBev vs. its peers and the market in general. BUD has been one of the weakest performing blue-chip consumer staple stocks vs. the S&P 500 Index ((^GSPC)) the last two years as pictured below. The chart also compares BUD to the Consumer Staples SPDR ETF (NYSEARCA:XLP), alongside alcoholic beverage peers Diageo plc (NYSE:DEO), Brown-Forman (NYSE:BF.B), Constellation Brands (NYSE:STZ) plus Molson Coors Brewing (NYSE:TAP). The 2017 performance for BUD has been better than average looking at the three and six month charts, while the 12-month and two-year periods still highlight real problems.

Fundamental Overvaluation

Current estimates by Wall Street analysts are calling for EPS of $4.22 in 2017 and $4.88 in 2018, with revenues only growing in the low single digits. I think current estimates are on the optimistic side, especially if (1) the Dollar rises the rest of the year affecting currency translations for overseas sales negatively, (2) we enter a recession affecting consumer demand, and/or (3) interest rates climb further affecting total interest costs on $122 billion in debt.

The price to earnings ratio for BUD is quite high at 27x forward 2017 projections and 24x forward 2018, a sizable premium valuation to the S&P 500 estimates in the 15-17 range. Measured from the AB InBev business organization in 2009, the company has sold at a P/E valuation closer to par with the S&P 500 average blue-chip.

3.7x trailing proforma sales per share for a stock valuation is also on the high end of its 10-year average closer to 3.0x. In addition, sales and earnings estimates are both lower now than last summer for 2017 and 2018. The actual trend in operating results does not appear to be hitting the estimated pre-merger path.

On top of the deteriorating fundamental situation, the company dug an even deeper hole on its balance sheet with the SABMiller merger, moving from a negative tangible book value of $55 billion in 2015 to a new industry record submersion of negative $100 billion.

Investors should question if the projected $18 billion in annual cash flow generation can cover $8 billion in common dividends, at least $5 billion in capital reinvestment to stay competitive, and be able to deal with any downturn in business results or increase in interest expense. The remaining free cash flow of $5 billion, after the dividend payment, leaves little room for error against $122 billion in debt and $177 billion in total liabilities. We are talking about 20 years to get back to a tangible accounting book value, all else being equal, and 35 years in theory to pay off all liabilities. These are very big numbers historically, indicating excessive and dangerous leverage levels.

Conclusion

From Thursday's lower trading action, investors should be aware that new headwinds to BUD's business operations may hurt the stock price disproportionately vs. other equity choices. The takeaway from the state of Massachusetts investigation into BUD's marketing practices is a leading beer industry position can mean greater scrutiny by consumers, investors and regulators alike.

If the optimistic management business plan sours, I would expect more assets sales, a cut in the common dividend payout, and new share issuance are possible outcomes to help cover Anheuser-Busch InBev's super high debt load. Don't take my word for it - management outlined this risk on page 5 of its annual report to the U.S. SEC.

The current overbought technical situation and overvalued fundamental position may turn out to be a great area to sell shares. In one of my Victory Formation sort formula's, AB InBev is a top sell or short sale candidate in the $115-$120 range during the rest of May and early June. Please engage in further research and due diligence before making any trade. Consulting an experienced investment adviser about your specific risk profile and financial situation can also be a useful and productive idea before entering any stock position.

Disclosure: I am/we are short DEO.

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.

About this article:

Expand
Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500.
Tagged: , , , Beverages - Brewers, Belgium
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here