U.S. Markets closed

Why Anheuser-Busch Inbev Stock Surged 14% in July

John Ballard, The Motley Fool

What happened

Shares of Anheuser-Busch Inbev (NYSE: BUD) gained 14.1% last month, according to data provided by S&P Global Market Intelligence.

In addition to a glowing second-quarter earnings report, which showed that people are drinking plenty of beer, there were a few developments during July that helped to highlight the value of A-B Inbev's vast global operations.

A large, overflowing glass of beer with a stem of wheat lying on a table.

IMAGE SOURCE: GETTY IMAGES.

First, Anheuser-Busch cancelled the IPO of its Asian operations, where the company hoped to realize about $10 billion to pay down its massive debt burden. However, the company immediately turned around and announced the sale of its Australian operations to a Japanese brewer for $11.3 billion. 

The combination of a strong earnings report and talks of billion-dollar deals had investors salivating over the king of beers last month, which naturally led to a higher stock price.

So what

Anheuser-Busch had its best quarterly volume sales performance in more than five years during the second quarter. Revenue increased by 6.2% year over year, driven by growth in key markets all over the world. Plus, sales of higher-margin products and cost discipline drove an increase in operating margin, which led to an increase in adjusted earnings per share of 14.7%. 

The IPO of the Asian business would have given A-B Inbev much needed cash to pay down debt, which it has a lot of, standing at a staggering $104 billion at the end of the quarter. But even without the IPO, investors seemed to have awakened to the value underlying A-B Inbev's global brewing operations.

Now what

Management continues to be very optimistic about its strategy to drive sales growth through its "premiumization" of beer strategy. Sales of the company's top global brands, such as Corona, Stella Artois, and Budweiser, grew by 11.3% outside of their home markets last quarter. It's clear A-B Inbev still has a lot of growth opportunity throughout the world, which partly explains the rationale for wanting to sell assets to pay down debt.

The proceeds from the sale of the Australian assets will be used primarily to reduce debt and free up cash to invest in growth in the Asia-Pacific region. Management's goal is to bring the company's net debt-to-EBITDA ratio down from 4.58 times this year to below 4.0 times by the end of 2020. That should loosen the company's purse strings enough to invest for the future.


John Ballard has no position in any of the stocks mentioned. The Motley Fool recommends Anheuser-Busch InBev NV. The Motley Fool has a disclosure policy.

This article was originally published on Fool.com