Anheuser-Busch InBev SA/NV BUD, also known as AB InBev, had a tough 2018, given the unfavorable industry trends resulting from consumers gravitating toward wine and other healthier options. This caused a steep fall in the volume of beer sold by the company, with most of the impact seen in the United States. Major consumer trends, such as premiumization, health and wellness, along with demographic changes in the population, are causing a segmental mix shift within beer.
Consequently, the company’s U.S. revenues fell 1.4% for the first nine months of 2018, mainly attributed to lower volume as its flagship Budweiser and Bud Light brands continued to lose market share. In the third quarter, Bud Light and Budweiser lost 90 basis points (bps) and 35 bps of the total market share, respectively. Further, the company’s total volume inched up 0.2%, with own-beer volume rising 0.5% while non-beer volume declined 2.4%. Beer volume growth in the quarter was mostly supported by strength in markets outside North America, including Mexico and Western Europe.
This industry turmoil also considerably weighed on the company’s top and bottom-line performance. Notably, AB InBev reported lower-than-expected earnings and revenues in third-quarter 2018. In fact, the company reported earnings miss in eight out of the 10 preceding quarters. Moreover, revenues missed estimates after three straight quarters of recording a beat. Earnings in the third quarter were mainly hurt by lower EBIT and higher income tax. Further, the company reported higher organic cost of sales due to increased commodity prices, which also hurt the bottom line.
The direct effect of the soft beer sales and a dismal surprise trend was visible in AB InBev’s stock performance through 2018. Notably, this Zacks Rank #3 (Hold) stock has lost about 42% in the past year, reflecting a wide gap from the industry’s 29.7% decline.
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Factors Indicating a Potential Rebound in 2019
Though the company’s graph so far has been disheartening, we see a potential to rebound in the new year, given its global brands’ strength, vast geographic reach and a robust forward view. Additionally, it may pick momentum from its recent venture in the fast-growing cannabis space.
Incidentally, the company entered a research partnership with medicinal cannabis manufacturer — Tilray, Inc. TLRY — in late December 2018. This $100-million deal includes an equal investment by both the companies, enabling them to conduct joint research on non-alcoholic, cannabis-infused beverages. Notably, the alliance is confined to Canada alone, where marijuana has been recently legalized for recreational use.
Through this partnership, AB InBev is likely to bolster its position in the marijuana industry, courtesy of Tilray’s excellence in cannabis. Meanwhile, this cannabis maker will cherish AB InBev’s rich experience in beverages.
Coming to AB InBev’s fundamental strength, we note that the company’s combined brand portfolio with SABMiller includes more than 500 beer brands, including some of the most renowned beer brands worldwide like Budweiser, Corona and Stella Artois. Further, the robust portfolio includes seven of the top 10 global beer brands, with 18 brands generating over $1 billion in retail sales.
Further, the company extended its operations to North America, Latin America (North, South & West), Europe, Middle East and Africa (EMEA), and the Asia Pacific. Moreover, it sells its beers in more than 150 countries. This speaks volume of its vast geographic reach. Additionally, AB InBev’s foray into the craft beer space and its planned buyout of organic energy drinks, sparkling water and juice maker — Hiball, underscores its focus on exploiting all opportunities to drive top-line growth.
All these factors helped this Belgium-based company to carve an impressive niche, thus, emerging as the strongest player in the beer space.
Despite a soft third-quarter performance, the company’s global brands — Budweiser, Corona and Stella Artois — continued to reflect strength. Consolidated revenues for the global brands improved 7.7% globally and 10.6% outside home markets. Strength in global brands reflects the company’s potential to grow, backed by improving trends in key markets and continued premiumization in the majority of its markets.
Though AB InBev sees volatility in certain key markets, it anticipates delivering strong top-line and EBITDA growth for the full year, backed by solid brand performance and robust commercial plans. Driven by the focus on category development, premiumization and revenue management initiatives, the company expects net revenue per hl growth to exceed inflation while costs are expected to come below inflation.
Furthermore, the company believes that it 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 the increased importance of deleveraging.
While the company’s recent performance and industry trends indicate continued slowdown for AB InBev, we are optimistic of its rebound, given its cannabis venture, after leading alcohol makers like Constellation Brands, Inc. STZ and Molson Coors Brewing Company TAP made a mark in this space. Additionally, the company’s vast portfolio and reach, alongside a favorable outlook shed fears of further downside for the stock.
Moreover, the company’s expected long-term earnings growth rate of 6.6% and our Momentum Score of A indicate that the stock has upside growth potential.
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