Anheuser-Busch Brewed Up an Impressive Quarter

Anheuser-Busch InBev (NYSE: BUD  )  released third quarter results on Oct. 31, and it showed impressive growth compared to the same period in 2012. In the next trading session, the stock moved higher, but has since come down below the level it was at prior to the report. Let's take a look and see if we should be buying on the weakness now or waiting for shares to come down even further.

The King of Beer
Anheuser-Busch InBev SA, or A-B InBev for short, is the largest brewer in the world. It has more than 200 brands of beers, and 14 of them provide sales of more than $1 billion each; these include Budweiser, Bud Light, Stella Artois, Michelob Ultra, and Beck's. It holds the No. 1 or No. 2 market position in 19 countries, including an incredible 47.6% share of the United States' beer market.

(Image Source: ab-inbev.com)

The results

On Oct. 31, A-B InBev released third quarter results. The reported earnings per share exceeded analyst expectations, but revenue came in lighter than expected. Here's a summary of the results:

Metric Reported Expected
Earnings Per Share  $1.36 $1.32
Revenue  $11.73 billion $12.00 billion

Earnings per share grew 17.2% and revenue rose 3%, while the company's gross margin expanded 171 basis points to 59.4%. Total volume declined 1.3%, but focus brands like Budweiser, Beck's, and Stella Artois saw a 0.3% increase. Just like in the second quarter, Budweiser led the way in terms of volume growth at 8.1%. The newly-acquired Corona brand also saw strong volume growth of 3.7% for the quarter. Overall, I am very impressed by this quarter because A-B InBev found ways to continually expand its margin in order to grow earnings in times of slowed sales.

What we were looking for
In our earnings preview, we cited margin expansion and an update on the Grupo Modelo acquisition as two of the most important things to look for. In terms of margin expansion, A-B InBev is on a tear and 59.4% is very impressive compared to its top U.S. competitor, Molson Coors (NYSE: TAP  ) , which currently has a 41.9% margin. I believe the company will see its margin exceed 60% by the conclusion of 2013 due to lowered costs of sales and cost synergies.

The Grupo Modelo acquisition has already been paying off in the four months since closing; management made several comments about cost synergies occurring quicker than expected and now projects $1 billion of cost synergies by the conclusion of 2016.

Cost synergies are the savings in operating costs A-B InBev is able to make by implementing its techniques in Grupo Modelo's operations; this may include layoffs or the closing of specific operations, but A-B knows how to be as efficient as possible. The acquisition was also cited as a direct reason for the 17.2% earnings-per-share growth during the quarter, which is ultimately why the acquisition was made in the first place--to grow the bottom line.

Competitor results
To check in on the competition, Boston Beer Co. (NYSE: SAM  ) , one of A-B InBev's largest competitors in the United States, reported third quarter earnings on Oct. 30. Earnings grew 19.1% and revenue rose 30% year-over-year, exceeding analyst expectations on both lines. The most impressive metric reported was its 53% margin, which is expected to remain between 52% and 54% for the rest of the year.

Even with these strong statistics, the stock was hit hard when management's full-year earnings outlook for fiscal 2013 came in below expectations. It has fallen over 7% in the days after the report, but I do not think a sell-off of this magnitude is warranted. The stock currently trades over 10.9% below its 52-week high, making it a strong value play at current levels based on forward estimates; however, it has run nearly 70% year-to-date, so investors looking to initiate a position should only buy half now and wait to purchase the rest at a later date. 

The next report to look for will come from Molson Coors on Nov. 6. We noted its weak margin of 41.9% earlier, but if Molson Coors is able to expand this margin with solid earnings and revenue growth, then it may be one to buy on weakness. I have not been a fan of this stock for a while, except for its healthy 2.4% dividend, but I will draw a fresh opinion following its report. 

The Foolish bottom line
Anheuser-Busch InBev is the largest brewer in the world with the best brand lineup in the industry. It is undervalued at current levels based on forward estimates and has pulled back after an impressive quarterly report. I believe it would be a great addition to any portfolio if weakness persists, so take a look and see if yours could use exposure to the world's beer market. 

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