Anheuser Busch Companies (BUD)

[FUNMAN]

Good article: Anheuser-Busch InBev: Taking Advantage Of A Borrower-Friendly Environment

Jan. 3, 2020 5:09 PM ET
About: Anheuser-Busch InBev SA/NV (BUD)

By: Wealth Insights
Dividend growth investing, long-term horizon, dividend investing, portfolio strategy

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https://seekingalpha.com/article/4315173-anheuser-busch-inbev-taking-advantage-of-borrower-friendly-environment

Summary

* Anheuser-Busch InBev is making progress in deleveraging its balance sheet.

* The stock remains well off of 52-week highs. The company had a soft Q3 due to various headwinds. We are still bullish on the business over the long term.

* We expect long-term total returns of around 10% once the company progresses to stated leverage goals. The current stock price is a solid accumulation point for long-term investors.

We have previously covered beer conglomerate Anheuser-Busch InBev (BUD). We outlined the strong underlying operating metrics of the business, but a debt-laden balance sheet has hovered over the company's head as a dark cloud. While the balance sheet is still a ways away from where it needs to be, management has effectively freed up some flexibility by lowering short-term maturities. Investors will need some patience, but Anheuser-Busch is poised to perform as a long-term investment holding.



Balance Sheet Is Improving

In roughly three years, the company has taken notable action to both free up cash flow and improve the balance sheet. For starters, the company has successfully shuffled much of its total debt load. Maturities due within the next five years have dropped from a total of $43.9 billion to $21.5 billion. It's important to note that 91% of this debt is fixed at rates near 4%, so it's nothing that is getting away from them. Interest expenses are stabilized. The total debt load has also dropped from $115 billion to $101 billion.

While this is adjusted to reflect funds raised from the IPO offering of Budweiser Brewing Company (BUDBC), the company is in the process of raising more cash by selling its Australian operations to Asahi Group (OTCPK:ASBRF) for $11 billion. The deal is currently being scrutinized by Australian regulators but will raise more cash for Anheuser-Busch InBev to deleverage with if it closes. With the proceeds from this pending sale, management has stated that leverage will sink to below 4x EBITDA on a net debt basis. A ratio of 2x is the company's long-term goal. Still, a way to go, but we are beginning to step away from the "brink of insanity" so to speak.

Dividend Is Solid With Long-Term Upside

One of the company's more drastic actions to free up cash flow was to cut the company's dividend payment. While nobody ever likes to see a dividend cut, the move freed up much-needed cash to aid the deleveraging process. However, the dividend remains quite viable. The payout currently totals 1.80 euros (about $2.01 USD), which yields approximately 2.41% on the price of ADR shares. This is still a bit higher than what 10-year US treasuries are offering at a yield of 1.87%.

Anheuser-Busch InBev generates roughly $10 billion in free cash flow. The annual payout totals an outlay for Anheuser-Busch InBev of roughly $4 billion, which results in an approximate dividend payout ratio of 40% based on FCF. This leaves room for a FCF efficient business such as Anheuser-Busch InBev (18.5% of revenues) to increase the payout down the road as deleveraging progress.

Anheuser-Busch InBev Should See Operations Improve Long Term
Anheuser-Busch InBev is currently working through some headwinds that are primarily out of the company's control. Management is seeing higher costs due to unfriendly commodity prices and FX rates.

In addition to these pressures, the company has seen volumes decline in some major markets. Beer volumes have seen pressure in the US, China, and Brazil. This is due to both market shifts, as well as economic headwinds in the case of Brazil. These margin and volume pressures forced management to lower guidance for the full year. The company pulled back expectations of "strong" EBITDA growth to "moderate" EBITDA growth.

With a company this large, these ebbs and flows are going to happen over time (and will eventually reverse as these factors can be cyclical). We also try to look long term to identify what will create value over time. The company remains the world's largest beer producer, with a global market share of 26%. The company continues to improve its efficiencies since completing its merger with SAB, generating $3.2 billion in synergies to date.

With estimated FCF efficiency at 17.5-18.5%, we would like to see that efficiency continues to rise over time. We are targeting pre-SAB merger levels of between 20% and 24%.

The company also continues to seek new growth drivers outside of its global beer portfolio (which was still up 4.1% Y/Y in third quarter). The company has seen growth in the US despite volumes slipping thanks to hard seltzer growth.

While we want to see management clean up its financial house for the time being, long-term investors can probably expect continued M&A potential. The team running Anheuser-Busch InBev has continually sought growth/scale through acquisition. Analysts are collectively forecasting Anheuser-Busch InBev to grow earnings at roughly a 10-11% rate annually for the next five years.

Valuation

Shares of Anheuser-Busch InBev currently trade for just over $82 per share. This is middling within the stock's 52-week range ($67-$102) and well below where the stock has traded in the past several years.

Considering projected EPS of $4.51 for the full fiscal year, the stock's earnings multiple of 18.30x is below its 10-year median PE ratio of 22.49x. This 18% discount reflects both the reduced dividend payout as well as the company's recent soft quarter (the stock got pummeled when earnings came out).

If we look at valuation from a cash flow basis, the company's current FCF yield of 4.69% is near the high end of its range since the SAB merger.

The stock has obviously been less expensive at earlier points, but that doesn't make the current valuation a poor opportunity to accumulate. For investors looking to hold Anheuser-Busch InBev through its continued journey to deleverage, getting such a cash flow efficient and non-cyclical business at 18x earnings is a solid deal in today's hot stock market. Without a mass market correction, it will be tough to approach the lows created right after the dividend cut, but there is still long-term upside for PE expansion at current levels. Anheuser-Busch InBev has a strong business model, muddied up by a highly leveraged balance sheet.

Wrapping Up

In time, we expect deleveraging to continue, FCF efficiency to continue approaching pre-merger levels, and raw material cost/FX rate headwinds to shift. As these come to fruition, investors should be able to expect total returns of at least 10% in addition to modest PE expansion. The company's high debt load is holding back not only the business from its full potential but also the market from appreciating it.