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Strong Volume Trends Drive AB InBev (BUD): What's Ahead?

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Zacks Equity Research
·6 min read
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Anheuser-Busch InBev SA/NV BUD, alias AB InBev, stock has been trending up the charts despite the doldrums in the on-premise channel, driven by its efforts to capitalize on opportunities in the shift in consumption to at-home occasions. Strength in the off-premise channel and premium brands as well as investment in B2B platforms, e-commerce channels and digital marketing in the past few months have been key growth drivers. Moreover, the company has been witnessing an improving volume trend, which has been aiding organic top-line performance.

Notably, the Zacks Rank #3 (Hold) company has a market capitalization of $121.9 billion. In the past year, the stock has rallied 75.8% compared with the industry’s growth of 5.9%. Moreover, it has comfortably outpaced the Consumer Staples and the Zacks S&P 500 composite’s growth of 31.7% and 67.6%, respectively, during the said period.


Additionally, the company’s expected long-term earnings growth rate of 2.6% and VGM Score of B indicate that the stock is likely to retain positive momentum in the days ahead.

Factors Driving the Rally

AB InBev’s top line has been witnessing momentum, driven by a marked recovery in volume and revenue per hectoliter (hl). Despite the pandemic-led challenges, it reported better-than-expected top-line results as well as organic revenue growth in fourth-quarter 2020. It registered an organic revenue growth of 4.5%, while revenues per hl were up 2.7%. Total organic volume improved 1.6%, with a 1.8% increase in own-beer volume and 1.7% growth in non-beer volume.

The High-End Company reported revenue growth of 4.1% in the second half of 2020, reflecting continued strength of the premiumization trend. Consolidated revenues at its three global brands — Budweiser, Corona and Stella Artois — advanced 1.5% globally and 1.3% outside their respective home markets in the fourth quarter. Moreover, the company’s fundamental strength as well as continued resilience in the global beer category aided sales results.

Moreover, investors were pleased with its favorable view for 2021. Although AB InBev expects continued disruptions and uncertainty from COVID-19, it anticipates the top and bottom lines in 2021 to improve considerably from 2020. It expects the top line to benefit from robust volume and pricing, which is expected to translate to bottom-line growth.

The Zacks Consensus Estimate for 2021 earnings is pegged at $3.15 per share, suggesting year-over-year growth of 64.9%. Moreover, earnings estimates have been unchanged in the past seven days. Further, the consensus mark for revenues is pegged at $52.4 billion, indicating growth of 11.8% from the figure reported in the year-ago quarter.

Additionally, AB InBev’s commercial strategy helped deliver strong performance in North America in the fourth quarter and 2020, including gains in the United States and Canada, even though the effects of the second wave of the COVID-19 pandemic resulted in renewed restriction hurting revenues. Notably, North America revenues grew 2.7%, while organic revenues improved 2.4%. This growth was driven by the outperformance of its above core brands, led by Michelob ULTRA and Bud Light Seltzer in the United States, and Corona and Michelob ULTRA in Canada. In the fourth quarter, continued execution of the commercial strategy resulted in market share gains of 40 basis points (bps) in the United States.

Also, AB InBev has been investing in new capabilities for several years to better connect with customers and consumers by leveraging technology such as B2B sales and other e-commerce platforms. These platforms remained more relevant amid the coronavirus pandemic as consumers were confined to their homes. Driven by the pandemic, consumers are quickly shifting to in-home consumption occasions, which has led to growth in the e-commerce channel as well as finding new ways to connect with others.

The company witnessed an acceleration in its proprietary B2B platform — BEES — in the past several months. In Brazil, Ze Delivery has been gaining traction and is currently present across the entire 27 Brazilian states. Going forward, the company remains keen on making the most of investments in its portfolio over the years as well as rapidly growing its digital platform, including BEES and Ze Delivery.

Possible Headwinds

Despite the positives, AB InBev continues to witness soft margins trend, driven by higher cost of sales, SG&A expenses and other costs, which also partly hurts the bottom line. In the reported quarter, higher cost of goods sold partly offset growth in the top line, which hurt the gross margin.

Cost of sales was up 0.2% year over year and 7.9% on an organic basis. Moreover, organic cost of sales per hl increased 6.4% due to supply-chain adjustments adapted to meet the evolving demand and operational deleveraging resulting from the impacts of COVID-19 on volumes. Notably, gross margin contracted 190 bps year over year to 58.6% in the fourth quarter. On an organic basis, gross margin declined 129 bps.

Additionally, SG&A expenses increased 0.5% year over year and 7.4% on an organic basis. Other operating expenses were up significantly year over year and 29.3% on an organic basis. Consequently, normalized operating income (EBIT) declined 6.3% year over year and 4.7% organically. Normalized operating margin contracted 70 bps year over year and 267 bps organically.

In 2021, the company expects EBITDA margin to remain pressured due to the adverse channel and packaging mix along with currency and commodity headwinds.

Better-Ranked Stocks to Consider

Diageo plc DEO has an expected long-term earnings growth rate of 8.3%. It carries a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Constellation Brands Inc. STZ, also a Zacks Rank #2 stock, has an impressive long-term earnings growth rate of 7.4%.

Compania Cervecerias Unidas, S.A. CCU presently has a Zacks Rank #2 and a long-term earnings growth rate of 10.2%.

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