Is This Beer Behemoth Drinking up All the Industry Profits?

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Recently, Anheuser Busch InBev (NYSE: BUD) has experienced a huge rise in the market price, from $88.80 per share to nearly $98 per share, its two month high, within just several days. The bullish market momentum for AB InBev was mainly due to the growing second quarter operating revenue. AB InBev was in the investment portfolios of many famous investors including Tom Russo, Jean-Marie Eveillard and Steven Cohen. Is AB InBev a good buy at its current trading price? Let’s take a closer look.

Global leader in beer, with a lot of coming synergies

In the second quarter, its revenue increased by 3.9% to nearly $10.58 billion while its EBITDA delivered a 5.8% growth to nearly $3.9 billion. The EBITDA margin came in at 36.8%, 67 basis points higher than the EBITDA margin last year. Interestingly, the revenue per hectoliter rose in many major markets including the U.S. (3.9% growth), Brazil (10%) and China (7.4%). Budweiser, its flagship brand, has experienced a decent growth at 6.3%, with the strong volume and share growth in China, Brazil, Russia and Ukraine. Its normalized EPS came in at around $0.93 per share, lower than normalized EPS of $1.21 in the second quarter last year. The lower EPS was mainly due to higher net finance costs and income tax expenses.

What investors might like about AB InBev is its global leading position, representing as much as 43% of the total global beer industry EBIT (earnings before interest and taxes). The company ranks number one in the U.S., Brazil and Mexico while having the number three position in China. Moreover, the company reported that Grupo Modelo integration had been processing quite well. The company focuses its efforts on driving daily sales execution and improved trade programs to achieve solid organic volume growth.

The company commits to generate as much as $1 billion of synergies in the next 3-4 years. Around 40-45% of the savings would be from cost of sales while the operating expenses might account for 55%-60% of the total savings. With the acquisition of Mexico’s Grupo Modelo, its net debt/EBITDA (earnings before interest, taxes, depreciation and amortization) was around 2.5. By 2014, AB InBev targeted reducing the leverage level to around 2 times net debt/EBITDA. It is trading at around $97.50 per share, with the total market cap of $156.20 billion. The market values AB InBev quite expensively, at 17.7 times its forward earnings. The company offers investors a dividend yield at 2.10%.

AB InBev could be a solid long-term stock with its global leading position in many countries. In the past ten years, outside China, the market share of the four biggest beer players has increased from 35% to 60% through massive consolidation. Latin America, the U.S. and Europe is quite consolidated now. However, there are plenty of consolidation opportunities for AB InBev in China and Southeast Asian countries, including Thailand and Vietnam. If the state-owned breweries in those countries were privatized on a larger scale, it could be a good opportunity for AB InBev for substantial future growth. 

How about Boston Beer and Molson Coors?

Compared to its peers including Boston Beer (NYSE: SAM) and Molson Coors Brewing (NYSE: TAP), AB InBev’s valuation stays in between. Boston Beer is the most expensively valued among the three, trading at $201.50 per share, with a total market cap of more than $2.6 billion. The market values the company at as much as 35.4 times its forward earnings. Recently, Boston Beer also experienced nearly 12.5% in one trading day, due to its impressive second quarter results. Its net income jumped as much as 37% from last year, thanks to the core shipment growth of 21%. Martin Roper, the company’s CEO commented that the growth in the second quarter this year was due to Samuel Adams beers and the improved distribution of Angry Orchard. With the recent strong earnings results, the company increased its earnings outlook, from the range of $4.70-$5.10 per share to a range of $5.10 - $5.40 per share. The full year EPS guidance was higher than analysts estimate at $4.98 per share. Boston Beer has not paid any dividends to shareholders yet.

Molson Coors has the cheapest valuation of the trio. It is trading at $50.90 per share, with the total market cap of $9.30 billion. The market values Molson Coors at more than 12 times its forward earnings. Molson Coors yields 2.60% at the current price. In the past five years, Molson Coors has improved its operating results a lot. The company reported that it generated nearly $750 million in cost savings and synergies since 2008. The free cash flow surged 70%, from $508 million in 2008 to $865 million in 2012. Molson Coors also managed to grow the after-tax profit at an annualized rate of 9%.

Looking forward, Molson Coors will focus on four main pillars including (1) delivering value added innovation, (2) investing behind power brands, (3) increasing share in “above premium” beer segment and (4) cost savings and delivering commercial excellence. Molson Coors has a historical record of cost savings. In the past eight years, the company has managed to save around $1.1 billion in cost. In the next five years, the company expects to save around $40-$60 million, including Central Europe deal synergies. Molson Coors also plans to restructure the business, including the international segment, reducing overhead expenses, executing global procurement and global standardization.

My Foolish take

Despite the expensive valuation, AB InBev seems to deliver shareholders a lot more when it completes the integration of Mexico’s Grupo Modelo. According to Barron’s, the company also benefited from its global domination, thanks to the Modelo acquisition and the success of turning Budweiser into the premiere brand in China. Analysts expect the company to grow its EPS by 15%, from this year’s forecast of $4.81 per share to around $5.54 per share.

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Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends Boston Beer and Molson Coors Brewing Company. The Motley Fool owns shares of Boston Beer. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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