Anheuser-Busch InBev: Trading Short-Term Risk For Sustainable Value
Summary
- Anheuser-Busch Inbev is in a transitional phase. In addition to the high debts, there is now also the coronavirus.
- In the first two months of 2020 alone, revenue and EBITDA were affected in the triple-digit millions.
- Against this background, the company is not a compulsory purchase at the moment. However, long-term investors may find some value in the company.
Introduction
The last few days have been bad times for stock markets around the world, but all the more so for Anheuser-Busch InBev (BUD) investors. When the company published the effects of the coronavirus on its sales and profit forecast, stock prices plunged to the bottom, clearly underperforming the market, both in the short and long term:
Data by YCharts
Of course, the further effects of the virus are not yet foreseeable. But I think that investors with a long-term horizon will find a valuable investment opportunity here. However, they must have the psychological strength to be able to deal with short-term fluctuations and book losses (depending on how the economy develops).
What happened?
By the question I do not, of course, mean the coronavirus specifically, which is the subject of much public debate. Rather, I mean the cause of the sharp fall in prices. Let us recapitulate the development briefly. The share price had already performed badly before, and all the gains made in the meantime (in 2019) were lost:
Data by YCharts
The first negative momentum came in October 2019, when the company had already lowered its expectations and announced only moderate growth instead of strong growth. In my analysis of the figures and the then-current situation, I came to the following conclusion.
Overall, I still see the company as a value company. Nevertheless, I don't expect any price jumps in the short term. The global headwinds do not vanish so quickly and will last for an uncertain time. But in the long term prices have been reached again, which are quite attractive for the purchase of an entry position or a repurchase.
Since then, the share price has deteriorated even further, which is why I'm glad I didn't make a buy recommendation.
(Source: Analysis from October)
Besides, however, the company is now confronted with the coronavirus, which appears to have a particularly strong impact on the business. In a press release the company has made the following statements:
The impact of the COVID-19 virus outbreak on our business continues to evolve. The outbreak has led to a significant decline in demand in China in both on-premise and in-home channels. Additionally, demand during the Chinese New Year was lower than in previous years as it coincided with the beginning of this outbreak. For the first two months of 2020, we estimate that the outbreak has resulted in lost revenue of approximately 285 million USD and lost EBITDA of approximately 170 million USD in China.
In FY20, we expect EBITDA growth of 2-5%, with the majority of our growth to be delivered in the second half of the year. In 1Q20, we expect EBITDA to decline by around 10% given the impact of COVID-19 on our results as well as a challenging comparable, especially in Brazil. The outlook for both FY20 and 1Q20 reflects our current assessment of the scale and magnitude of COVID-19, which is subject to change as we continue to monitor the development of the outbreak.
The company suffers because of its business model
A loss of this magnitude in just two months is, of course, a pretty heavy thing. The problem is that the effects can develop much further. While I do not expect the virus to spread throughout the year, other measures are certainly possible, such as rescheduling the 2020 Olympics and the European Football Championship in June. This could cause the share price to plummet even further, as this will have a massive impact on sales and profits. The fact is that Anheuser-Busch offers products that are mainly consumed at events with other people. The virus naturally ensures that many events do not take place, that people leave their homes less often and avoid larger crowds. It is not for no reason that especially the stock prices of promoters and ticket sellers for live events suffer from the coronavirus. Investors need to only look at the stock price development of the world's largest event promoter, Live Nation Entertainment (LYV):
Data by YCharts
A dividend cut is unlikely
Investors must be aware that this could also have an impact on the dividend. In 2018, Anheuser-Busch decided to cut the dividend to repay debts more quickly. In the long run, this was certainly the right step. At the same time, however, the company has also stated its priorities. This priority also shines through in the latest press release:
We expect dividends to be a growing flow over time, although growth in the short term is expected to be modest given our deleveraging commitments.
So far the virus is developing worse and worse. So let us conservatively assume that at least in the first half of the year, EBITDA will be burdened by the same amount as in January and February, the following calculation results. Let us continue to include a double negative effect in a rather negative scenario. This would take a particular account of the fact that the virus is spreading more and more and also affects the summer months in North America and Europe, where beer is particularly popular. In both cases, the impact on EBITDA and cash flow would be rather small:
(Source: FY 2019 results/table by author)
This makes a dividend cut rather unlikely for me. For dividend investors, the current development could, therefore, be a good opportunity to take advantage of the cost average effect. After all, nothing has changed from a purely fundamental perspective. Also, they get a respectable dividend yield:
Data by YCharts
However, cash flow-oriented investors who want to ensure dividend payments as early as this year still have some time to decide and observe the market. Although the company has already announced a dividend of EUR 1 per share, the ex-dividend date is only May 5. I think shares may continue to fall in the wake of the coronavirus. Accordingly, patience could pay off here.
Otherwise, things are going as expected
Otherwise, nothing has changed in the actual investment thesis. Operationally, things are not going extremely well for the company, but the company is nevertheless able to record sales growth. In FY 2019, revenue grew by 4.3 percent and by 2.5 percent in the fourth quarter of 2019 (revenue per hl growth was 3.1 percent in FY19 and 0.9 percent in the fourth quarter of 2019). EBITDA increased as well in FY19 (by 2.7 percent):
(Source: FY 2019 results)
The debt reduction is also proceeding as expected:
Accounting for the proceeds expected to be received from the divestment of the Australian operations (while excluding the last 12 months EBITDA from the Australian operations), our net debt to EBITDA ratio would be 4.0x for the 12-month period ending 31 December 2019.
Also fundamentally, the company is slowly coming into a range where I would classify it as fair or even slightly undervalued:
Data by YCharts
Conclusion
(Source: Webpage)
After every analysis of a company, I will use a three-grade rating for this series. Its purpose is to ensure that readers recognize at first glance whether a company might or might not be worth investing in. The three steps rating at a glance.
Buy the jewel now rather than tomorrow if:
- There are no downsides and the company has growth potential.*
- The upsides outweigh the downsides and the company has enormous growth potential.
Worth an investment (maybe later after a second look) if:
- The upsides outweigh the downsides.
- The upsides are equal to downsides but the company has growth potential.
No thanks if:
- No growth potential in the long term.
- The downsides outweigh the upsides.
*Of course, the growth potential is a part of the upsides, but it is also crucial in my final considerations.
Conclusion: The grade for Anheuser
The company is still in a state of transition. Debt reduction, in particular, remains a priority. To this difficult process now comes the coronavirus. All this can further burden the course price. The company is not a compulsory purchase at the moment. However, long-term investors may find some value in the company. Overall, these are the main reasons for my rating:
- Dividend yield increases.
- The dividend is also safe at present plus future dividend increases possible.
- Development of the coronavirus not yet foreseeable. Further price losses are very possible.
- The ex-dividend date is only in May.
Anheuser-Busch InBev is part of my diversified retirement portfolio. If you enjoyed this article and wish to receive other long-term investment proposals or updates on my latest portfolio research, click "Follow" next to my name at the top of this article, and check "Get email alerts."
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Analyst’s Disclosure: I am/we are long BUD. 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.
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