Can AB InBev (BUD) Break Fall Even as Beer Brands Lose Fizz?

Anheuser-Busch InBev BUD, alias AB InBev, like most of its peers, is suffering from the industry-wide decline in beer sales. The primary reason for the soft beer sales in the United States has been the shift of consumers to healthier drinking options, which has resulted in consumers gravitating to wine and drinks like sparkling water. This industry trend is compelling most of the beer companies to diversify and include newer drinks or innovate the beer range by lowering the alcohol content.

As mentioned earlier, AB InBev is not immune to this turmoil in the beer segment as it holds the top spot in the beer industry, controlling about one-third of the global beer market. The company’s diverse portfolio includes more than 500 brands. Its robust range of products includes global beer brands like Budweiser, Corona and Stella Artois. Further, AB InBev sells beer in more than 150 countries.

Notably, the company’s U.S. revenues fell 3.1% in second-quarter 2018 on the back of lower volumes, as its flagship brands — Budweiser and Bud Light — continued to lose market share. In the second quarter, Bud Light and Budweiser lost 85 basis points (bps) and 40 bps of the total market share, respectively. Further, the company’s own-beer volume has dropped 5% in North America due to the prevailing industry trends that put pressure on Premium and Premium Light brands.

Driven by these soft trends, the AB InBev stock has lost nearly 27.6% in the past year, underperforming the industry’s decline of 15.8%. Moreover, the industry is unfavorably ranked in the bottom 5% (243 out of 255) of the Zacks industries.

 

Not only this, the company has witnessed negative estimate revisions in the last 30 days, indicating that analysts are not very hopeful about the stock. The Zacks Consensus Estimate for earnings of $4.56 and $5.17 for 2018 and 2019 have moved south by 3 cents and 13 cents, respectively.

However, the company’s Zacks Rank #3 (Hold) and expected long-term earnings growth rate of 8.3% suggest that the stock still holds potential. Further, this is supported by a VGM Score of B for the stock.

Factor’s Supporting Upside Potential

AB InBev’s splendid second-quarter 2018 performance, anchored by better-than-expected top and bottom lines, reflects a reversal of its negative earnings surprise trend. Moreover, revenues surpassed estimates for the third straight quarter. The company gained from improving trends in key markets and continued premiumization in the majority of its markets.

Robust View Inspires Optimism

Though AB InBev sees volatility in certain key markets, it anticipates delivering strong top-line and EBITDA growth for the year, backed by solid brand performance and robust commercial plans. Driven by the focus on category development, the company expects net revenues per hl growth to exceed inflation while costs are expected to come below inflation. Moreover, premiumization and revenue-management initiatives are likely to aid revenue per hl growth.

Furthermore, the company expects to witness accelerated growth in the second half of 2018, driven by the extension of learnings from its category expansion framework and best practices across markets. The company is well positioned to drive category growth across its diverse geographic footprint on an ongoing basis, given its strong portfolio of global and high-end brands. AB InBev envisions dividend growth to be modest in the near term due to increased importance of deleveraging. However, dividends are likely to grow gradually in the long term.

Cost Synergies to Aid Growth

AB InBev is on track to reach its synergy and cost-savings target of $3.2 billion, announced in August 2016, following the acquisition of SABMiller. Notably, the company captured about $199 million of synergies and cost savings in the second quarter and $359 million in the first half of 2018. This brings the total synergies captured to date (since Aug 2016) to $2.5 billion. The company expects to achieve the remaining synergies of nearly $700 million by October 2020.

Organization Revamp Brings Renewed Focus

Backed by the successful integration of SABMiller, AB InBev has announced a few organizational changes to improve focus on the top line and value creation. Expected to be effective from Jan 1, 2019, the changes mainly include simplifying the geographic structure by shifting from nine management zones to six. Further, it is bringing Marketing and ZX Ventures under a common global lead to better analyze market, and consumer trends.

The company will also create two senior leadership positions to capture organic growth opportunities within the existing business. Appropriately, it has made leadership changes for the newly created zones. These changes are likely to place the company well for future growth.

Bottom Line

Though challenges related to the softness in beer sales are likely to hurt the company’s results in the near term, we believe AB InBev is poised for long-term growth, backed by its renewed organizational focus and efficient execution of strategies.

Do Consumer Staples Stocks Grab Your Attention? Check These

Some better-ranked stocks in the Consumer Staples sector are Archer Daniels Midland Co. ADM, Turning Point Brands, Inc. TPB and Medifast, Inc. MED, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Archer Daniels has increased nearly 10.3% in the past three months. The company delivered average positive earnings surprise of nearly 18.6% in the trailing four quarters.

Turning Point Brands has rallied 30.5% in the past three months. Additionally, it delivered positive earnings surprise of 2% in the last-reported quarter.

Medifast has surged 58.2% in the past three months. Moreover, the company has long-term earnings growth rate of 20%.

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