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ABEV vs. BUD: Which Alcohol Stock is Better Before Earnings?

Zacks Equity Research
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Alcohol companies are focusing on spending millions of dollars to convince people that alcohol consumption could be a healthy habit, according to published investigations by Stat, The New York Times and Wired. In fact, per a 2015 Gallup poll, one out of five Americans consider that “moderate” alcohol consumption is actually a healthy practice. This belief clearly benefits the alcohol industry because moderation for drinkers varies significantly when it comes to alcohol.

In this context, earnings of alcohol companies scheduled for release over the next week, assume greater significance. With both brewers, Anheuser-Busch InBev SA/NV BUD and Ambev S.A. ABEV scheduled to report earnings on May 9, this may be a good time to consider which of these is a better stock. Both AB InBev and Ambev S.A. carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Other major earnings scheduled on the same day include Booking Holdings Inc. BKNG and Twenty-First Century Fox, Inc. FOXA.

Price Performance

The AB InBev stock has declined 19.9% in the last one year, while the Zacks categorized Alcoholic Beverages industry has gained 1.1%. However, Ambev has increased 7.1%, significantly better than competitor AB InBev and the industry.

Valuation

The price-to-sales ratio is particularly relevant in a consumer-focused industry whose fortunes are dictated by the ebb and flow of sales. This ratio indicates the market value of each of the company’s sales dollars.

Coming to the two stocks under consideration, both are undervalued compared to the wider industry, which has an exorbitant P/S ratio of 19.24. However, Ambev is the pricier of the two, since it has a P/S ratio of 5.59, higher than AB InBev’s reading of 2.74.

Net Margin

Profitability ratios acquire greater importance in an industry characterized by low margins. Net margin is a good metric to compare the profitability of companies within an industry, since they are bound by the same business constraints.

With a net margin value of 14.11%, AB InBev is lower than the industry average of 21.6%. Meanwhile, Ambev, with net margin of 24.77%, is better placed on this count compared to its rival and industry.

Debt-to-Equity Ratio

The debt-to-equity ratio is a good indicator of the financial well-being of a company and is a good proxy for its debt-servicing capacity. In the context of the beer industry, it is an indicator of the company’s long-term sustainability.

Both AB InBev and Ambev have better leverage positions than the industry, which has a debt-to-equity ratio of 61.22%. Coming back to the individual companies, debt-to-equity ratio of AB InBev and Ambev is 1.45% and 10.36%, respectively. Clearly, with a low debt-to-equity ratio this round goes to AB InBev.

Asset Turnover Ratio

Since the alcohol industry is essentially characterized by low margins and high volumes, activity ratios are extremely important when determining the health of a company. All activity ratios are geared toward gauging a company’s ability to convert various heads under its balance sheet into sales or cash. The asset turnover ratio examines the level of efficiency with which a company utilizes its assets to conduct sales.

With an asset turnover ratio of 0.57, Ambev is comfortably placed with respect to the broader industry, whose value for this metric stands at 0.53. In this context, AB InBev has an asset turnover ratio of 0.45, which places it at a disadvantage to both the industry and Ambev.

Quick Ratio

Considered to be a conservative measure of liquidity, the quick ratio gauges as to how liquid the current position of a company is. In other words, it measures the extent to which liquid current assets can service current liabilities. The measure is conservative since it does not take into account current assets that are relatively less liquid such as inventory.

With a quick ratio of 0.66, Ambev is better placed than the broader industry, whose value for this metric stands at 0.63. AB InBev is poorly placed on this count since its quick ratio stands at 0.54.

Earnings History and ESP

While considering Earnings ESP, there is nothing to choose from between the two stocks for the current quarter as both the alcohol giants having readings of 0. However, taking into account a more comprehensive earnings history, Ambev has delivered a negative surprise in only one of the four preceding quarters and has an average negative earnings surprise of 5%. Meanwhile, AB In Bev is at disadvantage, as it has not only delivered negative earnings surprises in three out of the four prior quarters, but also has an average negative earnings surprise of 12.3%.

Conclusion

Our comparative analysis shows that AB InBev holds an edge over Ambev when considering valuation ratio and leverage position. But on all other counts Ambev has a clear edge. Not only does it have a relatively better price performance and good earnings history, it is better placed when considering net margin, debt-to-equity, asset turnover and quick ratios. In this context, Ambev clearly holds an edge over AB InBev ahead of earnings.

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Anheuser-Busch InBev SA/NV (BUD) : Free Stock Analysis Report
 
Ambev S.A. (ABEV) : Free Stock Analysis Report
 
Twenty-First Century Fox, Inc. (FOXA) : Free Stock Analysis Report
 
Booking Holdings Inc. (BKNG) : Free Stock Analysis Report
 
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