BUD’s Big Revenue Beat

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With the sweltering heat of summer, a time when many people enjoy drinking a frosty brew, it seems appropriate to have a look at beer brewer stocks. Typically a defensive industry, these companies have generally been doing a good job growing volume lately. The world’s number one beer brewer, Anheuser-Busch InBev (NYSE: BUD), reported revenue at the end of July that came in well ahead of the analyst consensus. Trading at a fair valuation, the stock may have more upside this year.

BUD at a Glance

Clearly, the Belgians know a thing or two about beer. With a huge $157.77 billion market cap, and around 118,000 employees, AB InBev is the world’s largest beer conglomerate. The Belgium-based company’s brands include venerable brews such as Stella Artois, Budweiser, Beck’s, Leffe, Michelob, Brahma and Jupiler. The stock is up around 24% in the last year, and yields around 2.10% at a fairly low payout ratio of 29%.

Strong Revenue Growth

The company has seen very steady earnings growth over the last few years, going from an annual EPS of $2.48 in 2009 to $4.55 in 2012 for an 83% increase. Despite a few misses along the way, the company looks well positioned for growth, with analysts expecting $4.83 per share over fiscal 2013 and a 3-5 year growth rate of around 24%.

The company’s most recent earnings report was upbeat. While Q2 2013 EPS of $0.93 missed expectations of $1.03, and were down from $1.21 in the same period a year ago, revenue beat quite substantially. Revenue for the quarter came in at $10.59 billion, up 7.26% year-over-year and well above the $10.2 billion consensus. The news sent the stock up 6%.

Geographically, Asia Pacific was the best performing region with a 5.1% volume increase for the quarter driven mainly by strength in China. The worst performing region was Western Europe, still mired in macro-economic difficulties, with a steep 7.2% volume decrease. Moving on to Latin America, the company’s incorporation of Grupo Modelo is going well according to management, and is expected to deliver around $1 billion in cost synergies over the next four years despite a fairly soft economy in the region.

Brazil, an important growth market, showed a small decline in volume, and things are expected to remain soft in the region throughout the year. Regarding the outlook more generally, the company expects strong growth in China to continue through 2013. Overall volume is expected to grow throughout the year, as well as revenue per hectoliter. 

Competing Brewers

SABMiller (NASDAQOTH: SBMRY) is one of AB InBev’s largest competitors, and released its full-year 2013 results towards the end of May. The report showed fairly strong growth for the company, with group revenue growth of 10% and adjusted EPS up 11% for the year. The group is also reliant on its developing markets of Africa, Latin America and Asia Pacific to sustain growth, and seems to be doing a good job in Asia especially, with a huge surge in volume. While the 2013 results were encouraging, the company’s 3-5 year expected growth rate of around 14% is below that of AB InBev.

Heineken (NASDAQOTH: HINKF), AB InBev’s Dutch rival, has also increasingly turned to emerging markets to fuel growth, although they didn’t have a particularly good first quarter. Revenue declined 2.7% on an organic basis, with organic volume down the same amount. The consolidation of Asian Pacific Breweries has been going as planned however, with low double-digit volume and revenue growth. For the report, the company tempered its expectations for full-year 2013, but still expects to grow volume and revenue.

Valuations and Metrics

AB InBev isn’t a particularly cheap stock at the moment, and looks more or less fairly valued at a P/E of 21 times trailing earnings versus SABMiller’s 24.54 and Heineken’s very low 10.74. The company’s operating margin of around 32% is strong compared to the industry average, and the return on equity of 18.44% is quite good. The company does have a fair bit of debt on the books, with a total debt to equity ratio of 97.58 and $13.88 billion in cash.

The Bottom Line

BUD had a good second quarter. While earnings missed the target, revenue came in well above the consensus, which sent the stock up following the report. With strong growth in Asia, especially China, the company seems well positioned to keep up this solid volume and revenue growth throughout the rest of year. On the other hand, the valuation seems fair at the moment, and patient investors may be best off waiting for a correction. 

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