This Stock’s For You

By Justin Carley - July 13, 2012 | Tickers: BUD, KO, NSRGY, PEP, UN | 0 Comments

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Anheuser-Busch Inbev (NYSE: BUD) shares surged more than 7% on the news that they will buy out the remaining 50% stake in Grupo Modelo.  The biggest just got bigger.  With the transaction, which is set to close in the first quarter of 2013, the company added the fourth most profitable beer in the world (Corona) and now owns five of the top six.  Think about that for a second.  They are so dominant that they sold their Crown Import joint venture to Constellation Brands, whose shares also surged on the news, in hopes that regulators won’t spoil the party.  Despite the run-up in the stock to the tune of more than 40% in the last year, happy times still lie ahead for patient investors.

ABI is so dominant in the beer industry that they are best compared to other global consumer product peers- the same companies that often get rave reviews thanks to their strong moats and steady dividend yields.  Investors often don’t realize how well ABI stacks up.  The company has better margins than nearly all consumer product behemoths, stronger EBITDA growth, and a much more attractive valuation based on cash flows and earnings.

Nestle (NASDAQOTH: NSRGY) is one the largest consumer products companies in the world.  The Swiss-based company trades in the U.S. with pretty low liquidity and off of any major exchange.  Nestle produced revenues of $94 billion in 2011, more than twice that of ABI.  However, ABI had the same EBITDA in 2011, approximately $15 billion, thanks to the premium margins it is able to generate.  Other large-cap consumer product companies, PepsiCo (NYSE: PEP), The Coca-Cola Company (NYSE: KO), and Unilever (NYSE: UN), had revenues between $46 and $64 billion, yet all produced less EBITDA than ABI.  Let’s see how ABI stacks up next to these highly respected companies. 

ABI EBITDA margins are hands down the best in the space.  And they have grown from 32% following the merger with Anheuser-Busch to their current level of 39% thanks to relentless cost cutting initiatives. 

ABI leads the pack when it comes to growth. 

Cash flow metrics are superior for ABI as well.  The cash from operations to sales ratio is shown below and is a measure of efficiency.  The FCF/sales ratio (not shown) yields similar results. 

Valuation

ABI’s recent strong performance has pushed the forward P/E ratio up to 16x, roughly the same as Nestle and Unilever.  Pepsi is actually higher at 17x, and Coke resides at 19x.  So the better growing company with higher margins and better cash conversion trades with a cheaper price-to-earnings ratio.  The dividend yield on ABI is “only” 2%, which is the lowest among the names discussed.  But don’t be a dividend yield fool, instead focus on dividend growth.  I have cited numerous times the advantage in seeking dividend growth over absolute yield in investment decisions.  As can be seen below, ABI has the lowest payout ratio at just 39%, compared to peers in the 50-60% range.  There is plenty of upside to move this ratio up, which can generate dividend growth at a higher rate than earnings growth.  This may not happen overnight, as the company will likely focus on debt reduction for a couple quarters following the Grupo Modelo purchase, but will accrue to patient investors.

Bottom Line

ABI is the name to own in the consumer product space.  The company is one of the best run in the world, trades at a still attractive 6.6% free cash flow yield, and has plenty of dividend growth in coming years.  It only has 15% exposure to Europe, pretty small given its dominating global scale.  Instead, the bulk of foreign operations lie in Latin America (36% of total sales).  Happy hour hasn’t ended on ABI just yet.  It makes for a great core holding that can help insulate AND grow one’s portfolio amid the frequent market gyrations and doomsday prognostications. 

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