Investing is tricky sometimes; you can do the right things like being patient, doing your homework, and still end up with a loser stock. Beer giant Anheuser-Busch InBev NV (BUD 0.03%), for example, is one of the largest and most dominant alcohol stocks in the world; yet, its stock price has been virtually flat over the past decade and has been down almost 40% over the past five years.
That's a tough pill to swallow for even the most patient investors; however, there seems to be some positive momentum in the business that could make the stock's next decade a lot more lucrative for investors. Here's why Anheuser-Busch deserves a second look.
Beer is a wonderful business model
Anheuser-Busch is the 800-pound gorilla in the beer industry. Its more than 500 brands include Budweiser, Bud Light, Corona, and Stella Artois and are sold worldwide. The company has an estimated 38% share of the global beer market, making it the largest brewer in the industry.
It has the large operations to make beer at competitive prices, and it can demand premium shelf space at stores and venues. The company's gross profit margin ranges anywhere from 50% to 60% -- almost as good as some tech stocks.
Anheuser-Busch is also a robust, cash-generating business; it converts 15 cents of every revenue dollar into free cash flow for management to use as needed. You can see in the chart above that margins and free cash flow generation have both trended downward over the years. There are two primary reasons for this pattern.
Acknowledging the challenges
The company has made massive acquisitions to become the giant it is today. Anheuser-Busch merged with InBev in 2008, a $52 billion cash deal that created Anheuser-Busch InBev. It then made an even more significant merger in 2016, combining with SABMiller in a $107 billion cash deal.
Anheuser-Busch's balance sheet was decimated, especially after the SABMiller merger, leaving the company with more than $110 billion in debt in the summer of 2018. Not only did management need to figure out how to bring two separate, massive companies together, but all of that resulting debt carries interest payments, which take away from the free cash flow that the business creates.
COVID was another setback as the company saw its business suffer during lockdowns when many restaurants and bars closed. Management reported that beer volume dropped 13.4% during the first half of 2020 when lockdowns peaked, causing a 12% year-over-year decline in revenue and a 24% drop in EBITDA (earnings before interest, taxes, depreciation, and amortization).
Encouraging signs of a recovery
Anheuser-Busch saw its business begin to rebound during the second half of 2020. Volumes were up year over year by 1.8%. That momentum has continued through 2021 with beer volumes up 17% in the first two quarters -- recovering from that weak first half of 2020 -- and Q3 volume was up year over year by 3.4%.
With business returning to normalcy, investors can begin focusing on the company's ongoing efforts to improve its balance sheet. It has taken steps like slashing its dividend to free up cash to pay down debt. In addition, it sold its Australian business unit for $11.3 billion in 2020.
Total debt has now dropped to just over $90 billion as of June 2021, its most recent financial update. Anheuser-Busch plans to continue paying down its debt and has structured it so that there's little due until 2024.
In other words, with the business rebounding from lockdowns and the balance sheet slowly improving, the outlook is finally beginning to look brighter for investors. The stock trades at a forward price-to-earnings ratio of 20, which doesn't seem cheap but is still below its historical average of 23. Earnings growth should pick up as the company sheds debt and lowers its interest expenses, which totaled nearly $5.9 billion over the trailing twelve months. Analysts are calling for earnings per share to grow around 11% annually over the next three to five years, and the market's sentiment toward the stock could improve as debt goes down.
Remember that Anheuser-Busch is the leader in the traditionally high-profit beer industry and its struggles have been self-inflicted rather than a poor business model. Wounds can heal over time, and with lockdowns in the company's rearview mirror, it seems that the beer giant's future days are the brightest they've been in a long time.