ANHEUSER-BUSCH INBEV BUD S
February 04, 2019 - 4:22pm EST by
obvious617
2019 2020
Price: 77.42 EPS 0 0
Shares Out. (in M): 2,019 P/E 0 0
Market Cap (in $M): 156,311 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0 0
Borrow Cost: General Collateral

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Description

  • Beer market is not healthy and likely to deteriorate
    • Consumers drinking less alcohol, younger demographic drinking less, beer is losing share to other alcoholic beverages, etc.
    • Global beer volumes used to grow lsd-msd but have been flat over the last 5 years
    • Pricing power appears to be eroding, in particular in the US
      • Two of the largest brewers believe beer has priced itself too aggressively in recent years and it’s getting to the point of being unable to take further price without accelerating volume declines
      • Some US distributors also believe beer is priced too high vs wine and spirits and we may see flat to down pricing going forwards
  • Cannabis will be incremental pressure
    • Public alcohol companies are quick to point out that there is no conclusive datshowing how it’s detrimental. However every private player and distributor we spoke with believes it will have a negative impact
    • Cannabis is a psychoactive property with fewer calories and without some of the negative physical effects of alcohol
      • Can replace after work-relaxation beer, replace some alcohol in social settings, etc.
    • Cannabis legalization in of itself doesn’t appear to drive meaningful new demand overnight but over time legalization pressures cannabis pricing and cannabis beverages are beginning to come out which should drive substitution at a higher rate
      • In the US by the time the big brewers are legally able to participate we expect state operators will have already saturated the market
  • ABI is poorly positioned
    • 81% of ABI’s volumes are mainstream or discount beer which are the worst performing segments as consumers trade up to premium beverages
      • Craft beer appears to have hit a ceiling in the US at 13% of volume but globally it only has 3% penetration and continues to take share
    • Business may be overoptimized
      • Heineken has a 17% EBIT margin vs ABI at 32%
      • Heard stories of sharing hotel rooms, shutting down elevators to conserve power, etc.
      • Research suggests management highly focused on hitting short-term #’s and their subordinates may be cutting into the bone to try and hit their #’s
    • Good chance of KHC type reinvestment needed
      • Beer experts we spoke with do not believe the margin structure is sustainable over the long run, we heard similar pushback from packaged food experts about KHC prior to their margin reset
      • Research suggested top 2000 employees are paid below market cash comp but provided stock related incentives which have historically been very valuable as the stock compounded
        • With the stock no longer compounding ABI may need to materially increase cash compensation
  • Operating trends are worse than headlines suggest
    • ABI highlights their headline organic growth however that is not value creating organic growth because it is driven by a pass-through of EM inflation vs mix shift, pricing, or volumes
    • We estimate price/mix in 2018 will be less than country weighted CPI
    • Underlying margins appear to be declining
      • SAB Miller synergies are in the final innings, excluding synergies it appears underlying EBITDA is organically declining
  • Valuation
    • Beer volumes have been weak for the last 5 years but ABI has benefited from synergies and input deflation
    • Now with synergies running out, and the balance sheet too levered to do large deals, the next few years do not look promising as cost-cutters try to pivot a potentially over-optimized business to organic growth
    • Going forwards if volumes are flattish, pricing is slightly below inflation, and they are out of cost cuts then EBIT does not grow in real terms
    • ABI is trading at 17.5x 2019 earnings with nearly 5x of debt
  • Risks
    • Manage to pull more levers
    • FX
    • Beer market improves
 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Misses street estimates 

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    Description

    • Beer market is not healthy and likely to deteriorate
      • Consumers drinking less alcohol, younger demographic drinking less, beer is losing share to other alcoholic beverages, etc.
      • Global beer volumes used to grow lsd-msd but have been flat over the last 5 years
      • Pricing power appears to be eroding, in particular in the US
        • Two of the largest brewers believe beer has priced itself too aggressively in recent years and it’s getting to the point of being unable to take further price without accelerating volume declines
        • Some US distributors also believe beer is priced too high vs wine and spirits and we may see flat to down pricing going forwards
    • Cannabis will be incremental pressure
      • Public alcohol companies are quick to point out that there is no conclusive datshowing how it’s detrimental. However every private player and distributor we spoke with believes it will have a negative impact
      • Cannabis is a psychoactive property with fewer calories and without some of the negative physical effects of alcohol
        • Can replace after work-relaxation beer, replace some alcohol in social settings, etc.
      • Cannabis legalization in of itself doesn’t appear to drive meaningful new demand overnight but over time legalization pressures cannabis pricing and cannabis beverages are beginning to come out which should drive substitution at a higher rate
        • In the US by the time the big brewers are legally able to participate we expect state operators will have already saturated the market
    • ABI is poorly positioned
      • 81% of ABI’s volumes are mainstream or discount beer which are the worst performing segments as consumers trade up to premium beverages
        • Craft beer appears to have hit a ceiling in the US at 13% of volume but globally it only has 3% penetration and continues to take share
      • Business may be overoptimized
        • Heineken has a 17% EBIT margin vs ABI at 32%
        • Heard stories of sharing hotel rooms, shutting down elevators to conserve power, etc.
        • Research suggests management highly focused on hitting short-term #’s and their subordinates may be cutting into the bone to try and hit their #’s
      • Good chance of KHC type reinvestment needed
        • Beer experts we spoke with do not believe the margin structure is sustainable over the long run, we heard similar pushback from packaged food experts about KHC prior to their margin reset
        • Research suggested top 2000 employees are paid below market cash comp but provided stock related incentives which have historically been very valuable as the stock compounded
          • With the stock no longer compounding ABI may need to materially increase cash compensation
    • Operating trends are worse than headlines suggest
      • ABI highlights their headline organic growth however that is not value creating organic growth because it is driven by a pass-through of EM inflation vs mix shift, pricing, or volumes
      • We estimate price/mix in 2018 will be less than country weighted CPI
      • Underlying margins appear to be declining
        • SAB Miller synergies are in the final innings, excluding synergies it appears underlying EBITDA is organically declining
    • Valuation
      • Beer volumes have been weak for the last 5 years but ABI has benefited from synergies and input deflation
      • Now with synergies running out, and the balance sheet too levered to do large deals, the next few years do not look promising as cost-cutters try to pivot a potentially over-optimized business to organic growth
      • Going forwards if volumes are flattish, pricing is slightly below inflation, and they are out of cost cuts then EBIT does not grow in real terms
      • ABI is trading at 17.5x 2019 earnings with nearly 5x of debt
    • Risks
      • Manage to pull more levers
      • FX
      • Beer market improves
     

     

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    Misses street estimates 

    Messages


    SubjectA couple of things worth mentioning
    Entry02/04/2019 07:50 PM
    Membereigenvalue

    I don't have a position in BUD, but I own Heineken Holding, so I looked at it pretty carefully.  I think that there may be a mistake in your thesis for  several reasons:

    a) BUD should have margins that are substantially higher than Heineken, given different markets in which it operates.  For instance, if I recally correctly, as much as 8% of EBIT comes from Columbia and Peru, where BUD has 98% market share, 50%+ EBITDA margins, and is unlikely to have meaningful competition for at least a decade.  Brazil is also a substantial contributor, and after Heineken bought out Kirin, prices started rising there.  In general, a very large portion of BUD's profits comes from markets where it operates in a duopoly, much more so than Heineken.

    b) I think that craft penetration is going to be a much smaller threat outside the US than it is in the US.  It is the unique nature of the US beer market, with its three tier distribution system that helped craft gain distribution and share.  This is absent in other markets, and distribution is a much bigger barrier to entry outside the US.  Moreover, the quality of the beer sold in these markets already is much better than what was sold in the US before craft came on the scene.

    c) Cannabis is interesting point.  In Uruguay where it was introduced a few years ago, beer consumption per capita actually rose.  So the jury is still out what legalization of marijuana will do to beer volumes.  From the research that I have read, marijuana tends to trigger psychological disorders in people prone to them, and of course driving while stoned is going to be a major problem.

    d) I seem to recall that a significant part of acquisition related synergies should come in 2020, and if I am not mistaken, the EPS estimate for 2020 is around $6 or P/E of around 13x, not terribly high.  

    e) SAB before the take-over had organic volume growth of around 1% per annum if I recall correctly, and unless I am mistaken, the combined entity I think has flat to slightly up organic volume growth.  Also, keep in mind that as time goes on, emerging markets become a bigger weight, and their superior growth in volumes will push up that organic volume figure.

    f) You are taking a significant trading risk.  If the company carves out its emerging market beer businesses, the newco could conceivably achieve P/E in the high 20s/low 30s.  Look at where consumer staples in the emerging markets trades - Unilever India or Indonesia trade at 30x+.  At that point, you could be getting US and Europe for free and the stock could easily go up 10 or 20 points.

    Again, I have no position, and prefer Heineken Holdings, but I would be very careful about shorting it here.

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