Last fall, following its third-quarter earnings report, shares of AB InBev (NYSE:BUD) began what would become a precipitous 20% slide, settling at just over $100 per share. The results themselves, which included a 2% drop in net income where analysts had been projecting a 4% increase, left much to be desired. However, for those investors willing to look past its current difficulties, that share price drop might just represent an ideal opportunity to buy shares in the gargantuan beer brewer. Here's why.
First, a bit of background. Prospective investors need to be aware of two pivotal points in the company's recent past. The first, of course, is its recently completed acquisition of SABMiller. The multinational brewer with roots in South Africa added scores of brands to AB InBev's portfolio and, perhaps more importantly, expanded the company's dominant market position in the developing world -- particularly in Africa and South America.
The second was the release of the company's key third-quarter results. Here are the headline numbers:
|Q3 2016||Q3 2015||YoY % Change|
|Total Revenue||$11.11 billion||$11.376 billion||2.3%|
Much of the quarter's fundamental weakness came from the AB InBev's second-largest market -- Brazil, which is often cited as one of the markets that will fuel the company's growth in the 21st century. Not only does Brazil have a population of more than 200 million, but it's also widely acknowledged as a key emerging economy.
Currently, though, Brazil's economy is suffering due to a recent decline in commodities prices and higher-than-normal inflation. (Consumer prices had risen as much as 8.5% as of the quarter in question). Brazil's economic woes lead to a 33% decrease in AB InBev's EBITDA and a 6% decrease in revenue year over year.
Given these problems, coupled with ongoing economic weakness in the African continent as well as a transport strike in Columbia, I'll wait on the company's results. Fortunately, if history is any guide, these difficulties will likely prove to be transient for AB InBev.
A history of expansion
What is known today as AB InBev is the product of two gargantuan mergers. The first occurred during the depths of the 2009 financial crisis, when European brewer InBev purchased American beer conglomerate, and Budweiser owner Anheuser-Busch. That merger had its merits: a combination of a sainted European/South American brewer with the market leader in the United States. Both companies had lauded histories and there were certainly cost savings to be had and economies of scale to exploit.
Five years later, AB InBev set its sights on becoming the world's undisputed dominant brewer. And so, after months of haggling with its target company, and a year, more or less, of catering to regulators in 30 countries, it completed its acquisition of SABMiller in October 2016.
Alas, instead of immediately fueling growth, the increased exposure to emerging markets that was a major rationale for the merger appears to have had a negative effect on the company's numbers. That is, at least in the short term.
A business built to last
The simple fact of the matter is that AB InBev's recent travails represent nothing more than problems that are typical for a multinational conglomerate. AB InBev operates in more than 100 countries, where it is the purveyor of more than 400 beverage brands. It would be unusual for a company of its size to not experience regional problems from time to time.
What is truly important for rational investors to pay attention to are the company's unique advantages, current valuation, and probable long-term results. Here, the picture remains good:
|Forward P/E Ratio||23|
|3-year Est. Annualized EPS Growth||12.2%|
|Current Dividend Yield||3.72%|
Not only does the company sport a nearly 4% dividend yield and a compelling price-to-earnings ratio, but it still offers investors something even more valuable -- near-monopolistic market shares in dozens of countries. As I've highlighted in the past, AB InBev's market dominance in numerous economies will become all the more valuable in the decades to come as these nations' per capita GDPs grow.
A few bearish thoughts
None of this is to say that investors will not be tested, nor that all is sunshine and roses at present. Recent results for AB InBev are indeed troubling, and while the causes of its difficulties will likely prove to be transient, its global scope means new problems in other key markets could easily pop up at any time.
Also, the company's heavy debt load is concerning. At the end of FY 2015, the company's debt-to-capital ratio stood at a reasonable 52%. To finance its SABMiller acquisition, however, required moves that ballooned that figure to 74.2% -- a manageable amount, but obviously less than ideal.
Lastly, the emergence of the craft beer craze and its impact on mass-market beers cannot be ignored. The company is making inroads in this growing segment, primarily via acquisitions, but those are defensive moves as opposed to offensive ones. Should consumers in emerging markets start to demand a more diverse, local offering of beers as their wealth rises, it could prove to be a major drag on BUD's growth in the decades ahead.
Foolish final thoughts
Difficulties aside, the world will continue to demand beer and, as its largest beer brewer with over 25% of the global market, AB InBev is ideally positioned to supply it with a "cold one" on a hot day. It offers a forward price-to-earnings ratio of 23, a dividend yield near 4%, and the dominant market share in a long list of emerging markets that includes Brazil, China, Columbia, and South Africa. All in all, the weight of the evidence points to AB InBev stock -- especially after the recent share price pullback -- as being too good an opportunity to pass up.