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Investment Thesis

Despite a COVID-related share price decline of around 50%, Anheuser-Busch (NYSE: BUD) has rebounded significantly since the slow reopening of the economy this summer, but is still trading 12% below their pre-COVID high, leaving AB undervalued. AB has already returned to growth in 3Q, and its strategy remains proven and unchanged. As society returns to normal, so too will AB’s sales and growth path.

Return to Normal

Since lockdowns started to ease this summer, their sales started to return to normal levels, mitigating its 10% YTD sales decline. Following their third quarter earnings released at the beginning of November, this was evident with $12.8B in revenue, 4% higher than 2019 on an organic basis and beating consensus estimates by $1.2B. This return to growth since their initial slide was driven by a 1.9% increase in volume in North and South America, and was driven by the success of Bud Light Seltzer in the ongoing seltzer war of 2020. As the economy continues to open up and a vaccine becomes imminent, the outlook for the beverage industry is becoming increasingly positive, which is not yet priced in for Anheuser-Busch.

Source: AB InBev

Outlook

AB is the world’s largest brewer and has a growth-by-acquisition strategy that has paid dividends following some of its recent acquisitions of Modelo, Oriental Brewery, and SABMiller. From their business overview in their 20-F, and put into simple terms, their playbook is to (1) acquire brands with promising growth, (2) expand distribution and (3) save on costs through centralization and synergies.

Source: Marketwatch

We know part (1) of the strategy is ongoing, with the aforementioned acquisitions in the last decade and their respective future prospects they may have. Part (2) has been demonstrated by their almost 2% volume increase versus this time last year, as we are coming out of a pandemic – a sure sign that figure would be higher if it weren’t for the pandemic. Also notable is Budweiser’s three-fold volume increase in China over the last three years, and sizeable increase in the UK during the same period. While part (3) of this strategy is evident on an annual basis since acquiring SABMiller, AB recorded a 9.6% increase in cost of sales in 3Q20 versus 3Q19. However, this is purely due to making rapid changes to adapt to evolving demand from bar and restaurant consumption to primarily at-home, individualized consumption. While it won’t be immediate, this will inevitably return to normal next year, and is when costs will return to normal.

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For AB, nothing has operatively changed. Share prices falling were a direct result of COVID-19, which priced in a decline in sales, but left their business model unchanged. Holding all other factors constant, if consumption returns to normal in mid-2021 and AB resumes its pre-COVID revenue, we will see AB return to pre-COVID valuation of upwards of $80 per share.

Short- and Medium-Term Growth

In the short term, as the world continues to open back up, AB will remain on its path of revenue growth and should see this trend continue as consumption returns to normal. Regarding their spike in cost of sales due to “rapidly adjusting [their] supply chain to meet evolving demand,” as venues open back up and revitalize on-trade sales, we can expect a cost reduction in line with the 9.6% they increased by in 3Q. Whether they improve the efficiency of the rapid supply chain and distribution adjustments or revert back to business-as-usual, the sudden shock Coronavirus brought to AB’s income statement will not be felt forever.

Following the 10% decline in sales YTD, I am projecting a rebound in sales growth of 8% next year following the return to growth we saw this quarter. I believe this rebound will be boosted by the postponement of many events that are planned for the remainder of this year that gets rescheduled in 2021. Beyond that, AB has roughly 30% market share with a secular industry annual growth rate of 8%, I foresee AB’s medium-term revenue growth reaching 3%. Under the assumption that they can continue capturing 30% of this growing market, 3% medium-term growth is fairly conservative. From their most recent quarter, we have already seen sizeable increases in volume in key markets, which will continue to grow as they increase their presence in existing countries and expand to new markets. Following these assumptions, we should see a modest boost to AB’s top-line by the end of next year with more growth to come as AB makes a full recovery and stays in line with industry trends.

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Source: AB InBev

Risks

AB has a worldwide presence that reduces its geographic concentration risk as compared to other brewing competitors, but on the other hand, this creates foreign exchange risk. In AB’s second largest market, Latin America, there is a correlation between GDP growth and beer consumption, so the firm is at the mercy of global economic growth. Given Latin America’s GDP growth projections, this could pose significant risk to AB’s overall top-line.

GDP Real Growth Rate in Latin AM and Caribbean in 2020 & 2021

Source: Statista

Input costs and the duration of COVID also pose as risks to AB’s valuation and profitability. They have many commodity inputs that are sensitive to price fluctuations, and if input prices go up, AB will either have to absorb the costs, pass it onto the consumer, or both. In times of economic weakness, passing these costs onto the consumer becomes more of an issue. The last of these risks is more of a when question than an if question. We have already seen the global economy come out of lockdown over the summer, which is reflected in AB’s volume increase YoY. But, as we have seen in the last few weeks, parts of the United States and Europe have seen spikes in cases that have led to reenacted partial closures, albeit much less strict in many cases. Although a vaccine is on the horizon, there is still uncertainty on when society will return to normal, or more importantly for AB, when bars and restaurants will sell at the same yearly levels. This poses a risk to the horizon I mentioned, with possible recovery times later in 2021.

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Conclusion

AB suffered alongside the beverage industry at the start of COVID, but has seen a resurgence in sales as things became a little more normal during the summer months. 3Q was an inflection point for AB as it returned to growth, and it continues to rely on its (1) acquisitive strategy to grow its presence across the world, (2) increase distribution and (3) find efficiencies to cut costs. As the world rebounds from COVID with a vaccine on the horizon, AB has already returned to revenue growth and will continue on its path to pre-COVID sales and valuation by early to mid-2021 and pre-COVID growth estimates not long after. Given its current valuation, AB is an attractive short-term buy, and a long-term hold if it continues to capitalize on its growth strategy.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in BUD over the next 72 hours. 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.



Via SeekingAlpha.com