Anheuser-Busch InBev (BUD) is the world’s largest brewery, boasting over 500 different beer brands. With a strong portfolio and cost advantages, AB InBev outperforms its competitors operationally.
Despite recent controversies and challenging macroeconomic conditions, the stock remains undervalued by about 40%.
Considering the undervaluation, ongoing financial strength, and robust economic moat, AB InBev is a strong buy. Long-term value-oriented investors can expect significant returns.
Anheuser-Busch InBev (AB InBev) is a multinational brewer headquartered in Leuven, Belgium. It operates in over 150 countries and sells more than 500 beer brands, including Stella Artois, Budweiser, and Corona Extra.
Through strategic acquisitions and mergers, AB InBev has become the market leader in the beer industry. Its acquisition of SAB Miller in 2016 solidified its position, giving it a 30% market share, far surpassing competitors like Heineken N.V. (OTCQX:HEINY) with just 11%.
While the company has taken on significant debt through its expansion, it has been actively working to reduce it since 2016. AB InBev’s CEO, Michel Doukeris, has been instrumental in streamlining operations and driving efficiency.
Robust Economic Moat
AB InBev boasts a wide and robust economic moat, supported by its cost advantage and extensive brand portfolio.
The company leverages economies of scale to negotiate favorable supply deals, reducing costs throughout its production and distribution processes. This has resulted in efficient operations, with lower production costs compared to competitors like Heineken N.V.
AB InBev’s vast portfolio of over 500 beer and beverage brands gives it a competitive edge in the market. The company’s strategy of expanding into premium brands and developing trendy alcoholic beverages helps it extract higher margins without significantly increasing production costs.
Despite some short-term challenges, such as a boycott of Budweiser, AB InBev’s brand diversity and global footprint insulate it from major risks. The company’s ability to adapt to changing consumer preferences further strengthens its market position.
AB InBev has consistently generated solid profits and improved margins over the past five years. While the returns are not exceptional, the upward trend reflects positive growth.
The company’s gross margin remains strong, indicating a lucrative business model that has weathered short-term headwinds and macroeconomic challenges.
In the first two quarters of FY23, AB InBev reported strong revenue growth, driven by premium brands and organic volume growth. The company’s profitability and operational performance remain intact despite some increase in material and transportation costs due to inflation.
AB InBev’s well-managed balance sheet and planned debt reduction strategies indicate its ability to meet obligations. Despite some short-term liquidity concerns, the company’s cash flow and profitability provide confidence in its long-term financial stability.
AB InBev’s valuation metrics, such as P/E and EV/EBITDA ratios, suggest undervaluation. However, the elevated EV/Sales ratio raises some concerns.
An intrinsic valuation calculation indicates a significant undervaluation of AB InBev shares, supporting the notion of deep-value territory.
While short-term valuations may fluctuate, AB InBev’s long-term potential remains strong. The company’s competitive advantages and commitment to profitability make it an attractive investment option.
Risks Facing AB InBev
AB InBev faces risks related to increasing inflation and rising competition, which could impact profitability and sales. Higher raw material and transportation costs could put pressure on margins, while growing competition from craft beers and alternative beverages may erode market share.
The controversy surrounding Budweiser’s ad campaign poses minimal risk to the overall brand portfolio. AB InBev’s diverse product range and global presence help mitigate risks associated with specific products.
From an ESG perspective, AB InBev is committed to reducing its environmental impact and has received multiple ESG-related distinctions.
Anheuser-Busch InBev remains a market leader with a strong portfolio and cost advantage. Despite short-term challenges, the stock is undervalued, presenting an opportunity for value-oriented investors.
While the timeline for a return to pre-2016 profitability is uncertain, AB InBev’s economic moat and market dominance position it for long-term success.
Considering the risks and potential rewards, AB InBev is a solid investment option for investors seeking exposure to the beer industry.