Anheuser-Busch InBev: North American Headwinds Bottoming – Long-Term Recovery Ahead (BUD)

We previously covered Anheuser-Busch InBev SA/NV (BUD) in November 2023, discussing its (still) impacted sales volume in the North American region, with losses intensifying as the management had to provide financial assistance to its wholesalers.

Then again, we had maintained our Buy rating, with the management’s successful marketing efforts in other regions contributing to its excellent FY2023 guidance and the promising consensus forward estimates through FY2025.

In this article, we shall discuss why we remain optimistic about its long-term prospects, with BUD reporting bottoming headwinds in the North American sales and stabling market share by FQ4’23.

At the same time, the management continues to invest in the high growth spirits-based ready-to-drink/ zero beer segments as consumers increasingly demand healthier and expanded beverage options.

As a result of the well-balanced prospects, we believe that BUD may deliver a more than decent capital appreciation over the next few years.

The BUD Investment Thesis Remains Tempting Here, With Great Upside Potential Ahead

For now, BUD has reported a relatively decent FQ4’23 earnings call, with revenues of $14.47B (+6.2% YoY organic), adj EBITDA of $4.87B (+6.2% organic), and adj EPS of $0.82 (-4.6% YoY).

FY2023 brought forth similarly decent numbers of $59.38B (+7.8% organic), $19.97B (+7% organic), and $3.05 (inline YoY), respectively, with the decline in its own beer volumes by -2.3% YoY well-balanced by the growth in the non-beer volumes by +2.1% YoY.

On the one hand, it is apparent that BUD has faced a drastic decline in the North American sales by -$1.37B and adj EBITDA by -$1.26B on a YoY basis in FY2023, attributed to the Dylan Mulvaney backlash.

With the region being its top-line driver in FY2022, we can understand why the beverage company has not been able to recover from the backlash as many consumers opt for competitor brands.

If anything, BUD has been painfully “unseated” with Modelo now being the top-selling US beer, as Modelo Especial commanded the winning spot with 8.7% in retail share compared to Bud Light at 7.3% for the the week before and after the Super Bowl.

With Bud Light’s sales volume down by -30% on a YoY basis during the Super Bowl week, it is unsurprising that the management has commented that the company’s “full growth potential (in FY2023) has been constrained by the performance of its US business.”

BUD’s Global Operations

On the other hand, with BUD’s headwinds concentrated in the US, it is also apparent that all other regions reported more than decent growth thus far, somewhat balancing the situation.

This further exemplifies the beverage company’s well-diversified global offerings across Beer and Beyond Beer (including ready-to-drink beverages), Spirits, and Wine, allowing the management to pull multiple levers to drive volume growth, market share expansion, and balanced financial performance.

If anything, BUD has continued to invest in its highest growth segment, Beyond Beer, as consumers increasingly demand healthier and expanded alcoholic beverage options.

This move has proven to be relatively successful, with BUD’s non-alcoholic beer options generating a market leading US sales of $117.42M in 2023, well exceeding Heineken (OTCQX:HEINY) at $77.45M and Athletic Brewing at $51.83M.

Globally, BUD’s numerous zero-beer options have also triggered an impressive “high-teens revenue growth in FY2023,” underscoring its ability to appeal to the health conscious consumers.

If any thing, the BUD management has already scored the first-ever beer sponsorship deal with Corona Cero in the Olympics through 2028, further underscoring their determination to generate new growth.

At the same time, BUD’s spirits-based ready-to-drink portfolio delivered double-digit volume growth, well outperforming the industry in FY2023.

With Euromonitor projecting that nonalcoholic spirits may grow at a CAGR of +30% over the next few years, compared to the +6% estimates for conventional spirits, we believe that we may see the company’s well-diversified alcohol portfolio generate new growth while capturing meaningful market shares in the long-term.

BUD’s Stabling Sales In North America

At the same time, things seem to be stabling on a QoQ basis, as the decline in BUD’s North American sold volumes peaked by FQ3’23 at -4.74K hls and improved on a QoQ basis by FQ4’23 to -3.56K hls.

The same has been reported in the narrowing market losses of -4.43 points as of February 2024, compared to the -5.63 losses reported in May 2023 and -4.74 losses in December 2023.

While the North American market is likely to underperform in the near-term, we maintain our belief that the worst may be behind us, as the management continues to navigate the challenges and slowly regain its beer market share moving forward.

As BUD intensifies their marketing efforts and invests in multiple partnerships, it is unsurprising that the North American adj EBITDA margin has suffered at 29.2% in FQ4’23 (-2.7 points QoQ/ -6.3 YoY) and at 31.4% (-5.2 points YoY) in FY2023.

As a result of its intermediate-term headwinds, readers may want to note that similar bottom line headwinds may continue until things normalize.

For now, despite the US market headwinds, BUD continues to deliver robust shareholder returns, with the consistent share repurchases delivering stable share count of approximately 2.01B, on top of the impressive dividend growth of +9.3% YoY from €0.75 per share in 2022 to €0.82 per share in 2023.

At the same time, the management continues to focus on deleveraging its balance sheet with moderating long-term debts of $72.03B (-6.3% YoY) and growing cash/ equivalents of $10.33B (+3.6% YoY) in FY2023.

As a result, it is apparent that BUD has been putting much of its robust Free Cash Flow generation of $8.62B (+6% YoY) to good use, further underscoring why the stock remains a viable dividend investment thesis.

At the same time, the management has guided excellent adj EBITDA growth of between +4% and +8% in FY2024, improved than its historical growth at a CAGR of +2.5% between FY2016 and FY2023.

The Consensus Forward Estimates

As a result of these promising developments, we can understand why the consensus have moderately raised their forward estimates, with BUD expected to generate an accelerated top/ bottom line expansion at a CAGR of +4.6% and +6.4% through FY2026.

This is compared to the previous estimates of +4.5%/ +5.5%, further implying that the market is confident about the company’s ability to weather the temporal North American headwinds.

BUD Valuations

As a result of these developments, we maintain our belief that BUD remains attractively valued now at FWD EV/ EBITDA of 9.09x and FWD P/E of 17.78x, compared to the 3Y pre-pandemic mean of 13.25x/ 21.47x.

While these numbers appears to be elevated compared to Molson Coors Beverage Company (TAP) at FWD P/E of 11.83x, BUD’s valuations remain reasonable when compared to its alcohol beverage peers, including Carlsberg (OTCPK:CABGY) at FWD P/E of 16.58x, HEINY at 17.20x, and the sector median of 17.79x.

As a result, we believe that BUD is not expensive here, with the management’s recent execution further demonstrating why they have learnt their painful lessons and are extremely focused on reversing the US consumer sentiments while generating global growth.

So, Is BUD Stock A Buy, Sell, or Hold?

BUD 5Y Stock Price

For now, BUD has lost part of its recent FQ4’23 gains, as it is reported that Altria (MO) will be selling part of their BUD stake to fund share repurchases.

However, we believe that the recent pullback triggers an expanded forward dividend yield of 1.37%, relatively inline with its 4Y average of 1.39%. Dividend hunters may also look forward to the 2023 dividends payable on June 07, 2024 for shareholders of record May 06, 2024.

Based on the FY2023 adj EPS of $3.05 and the FWD P/E valuations of 17.78x, we believe that BUD is trading near to our fair value estimate of $54.20. Based on the FY2026 adj EPS estimates of $4.51, there appears to be an excellent upside potential of +33.8% to our long-term price target of $80.10 as well.

As a result of its (prospective) dual pronged returns through capital appreciation and dividend incomes, we are maintaining our Buy rating for the BUD stock here.