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Know the AB InBev (BUD) Stock In and Out Before You Invest

Zacks Equity Research

Anheuser-Busch InBev SA/NV BUD, alias AB InBev, is witnessing robust top and bottom-line trends, owing to continued strength in global brands. Results were driven by improving trends in key markets and continued premiumization in most of its markets. The company’s cost-saving efforts also bode well.  Furthermore, its recent IPO for the Asia unit is poised to help in debt reduction. These factors profess that the company is poised for growth in the long term.

However, we cannot ignore the headwinds arising from adverse currency translations and commodity cost inflation, which are weighing on the bottom line. Higher commodity costs mainly stem from higher aluminum and barley prices. Further, soft beer sales in the United States due to consumers gravitating toward wine and other healthier options remain a concern.

Factors Likely to Support Growth

We are optimistic about AB InBev’s solid brand portfolio and geographic reach. The company’s 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 kitty includes seven of the top 10 global beer brands, with 18 brands generating over $1 billion in retail sales.

AB InBev, which also shares space with Boston Beer Co. SAM and Molson Coors TAP, remains focused on further solidifying strong images and market positions of these brands to enhance relations with consumers. Moreover, the company keeps coming up with near beer alternatives along with no and low-alcohol beers to provide greater choices to consumers. In fact, management expects the low and no-alcohol beer category to account for about 20% of its global beer volume by 2025. All these factors helped this Belgium-based company to carve an impressive niche, thus emerging as the strongest player in the beer space.

Notably, AB InBev delivered solid results for its three global brands — Budweiser, Corona and Stella Artois — in second-quarter 2019. Consolidated revenues for the brands improved 8% globally and 11.3% outside their respective home markets. AB InBev’s 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.

Additionally, the company is on track to reach its synergy and cost-saving target of $3.2 billion that was announced in August 2016, following the acquisition of SABMiller. Of this, nearly $547 million was reported by SABMiller as of Mar 31, 2016, and about $2,604 million was captured between Apr 1, 2016, and Jun 30, 2019. Clearly, the company captured about $3.15 billion of synergies since the announcement. It expects to achieve the remaining synergies of nearly $50 million by the end of 2019.

Moreover, the company is poised to lower debt levels with the recent debut of its Asia Pacific (APAC) subsidiary, Budweiser Brewing Company APAC Limited, on the Hong Kong Stock Exchange.  The Asia unit’s stock rose more than 6% on its market debut in Hong Kong on Sep 30. The successful IPO, which is the second-largest IPO this year after Uber Technologies UBER, should help the parent company to significantly reduce debt burden from nearly $5 billion of funds raised through this issue.

Near-Term Hurdles

Though the company’s long-term growth prospects remain intact, adverse currency translations and commodity cost inflation remain the prime near-term headwinds for the company. Driven by higher commodity costs, cost of sales increased 7.2% organically while the cost of sales per hl grew 4.4% in second-quarter 2019.

For 2019, the company projects cost of sales per hl to increase in a mid-single digit as currency and commodity headwinds will be partly offset by the cost-management initiatives.

Moreover, AB InBev is witnessing softness in beer sales, particularly in the United States, as consumers gravitate toward wine and other healthier options. Major consumer trends, such as premiumization, health and wellness, along with demographic changes in the population are causing a segment mix shift within beer. Although the company witnessed revenue growth of 1.8% in the United States in the second quarter, driven by the execution of the commercial strategy; total and own-beer volume in the region declined 2.4% and 2.5%, respectively.

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