As soon as I got my post-MBA job at Anheuser-Busch InBev NV (ADR) (NYSE:BUD) in 2011, I became a shareholder. At that time, up-side potential for the stock seemed obvious. There were huge synergies to be exploited from the 2008 take over of Anheuser Busch. Besides, it was clear ABInBev’s super-skilled top management would lower the company’s debt faster than many expected
At the time I acquired my first Anheuser-Busch InBev NV (ADR) (NYSE:BUD) shares, the company was trading at around $40 per ADR and my target price was $85 per ADR. Now, the company trades around $95, but the brewer has also increased its intrinsic value though very interesting and sizable (synergy-rich) deals. The most significant deal that ABInBev has recently completed was the acquisition of Grupo Modelo, the owner of the popular Corona brand. This particular acquisition gives ABInBev further room for worldwide growth.
Let’s make a review at this quarter’s results for the company and, hereafter, I will compare AB InBev to two competitors in order to see if there is more upside coming from the company at current prices.
ABInBev’s First Quarter Results.
1) Clearly the most salient (negative) surprise was Brazil. Since 2011 Anheuser-Busch InBev NV (ADR) (NYSE:BUD) has been increasing prices incessantly. Price hikes combined with weak consumer confidence and accelerating food inflation have kept volumes under pressure. The company’s typical (mega strict) cost management should help margins going forward, but I think we shall not see the pricing boom we have seen in the last two years. Hence, I would not expect anymore aggressive EBITDA margin expansion from the Brazilian operation.
3) US margins set to improve: While Q1 North America margins declined for a fourth consecutive quarter, I expect margins to expand over coming quarters as i) strong pricing trends continue, ii) distribution costs moderate as new liquid innovations are expanded into more breweries.
3) The company has kept its Focus on Free Cash Flow yield, not just volumes: Anheuser-Busch InBev NV (ADR) (NYSE:BUD)’s 2013 5.5% Free Cash Flow Yield is expected to grow up to 6.5% in 2014. This expected 6.5% yield is unparalleled in the Consumer Sector so even with Brazil growing volumes slower than expected, ABInBev has not lost focus on shareholder value.
Is it there up-side left?
To answer this question we need to look at valuations. Let’s compare Anheuser-Busch InBev NV (ADR) (NYSE:BUD) with its biggest competitor, SABMiller (LSE:SAB) and an American Classic, Molson Coors Brewing Company (NYSE:TAP).
Given its international footprint and its monopolistic market position in many markets (such as Colombia and Peru) SABMiller is more useful as a comp for ABInBev than Coors. That said, Coors offers a valuation standpoint for North America since it controls roughly 30% of the US beer market against the 45% controlled by ABInBev.
– 2013 Multiples: While ABIInBev has a EV/EBITDA of 12.8x, Coors trades at 17x and SAB trades at 15.4x. Meanwhile, Price to Earnings are 19.2x for ABInBev and 20x for Coors and 22.75x for SAB.
– Dividends: Cash yields are favorable to Coors with a 2.51% yield. SAB offers a 1.73% yield and ABInBev a yield of 2% (expected for the current year).
The figures are clear, Anheuser-Busch InBev NV (ADR) (NYSE:BUD), even after its huge out-performance last year (the shares went up by 30% Year over Year), still is a compelling investment relatively to its competitors. That said, I think the brewer is fairly valued. There is a lot of up-side coming from Asia (above all China) but the company is not longer tremendously under-valued as it was back in 2011. The same applies to Coors and SABMiller, which is the stronger player in the raising Chinese market. I will stay long ABInBev probably forever, but I wouldn’t increase my current position. At least until the stock price comes down – if it ever does.
Federico Zaldua owns AB InBev’s shares. The Motley Fool recommends Molson Coors Brewing Company.
The article The King Of Brewers Is Fairly Valued originally appeared on Fool.com.
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