Anheuser-Busch: this action is for you

Investing is sometimes tricky; you can do the right things, like be patient, do your homework, and still end up with a losing stock. beer giant Anheuser-Busch InBev SA (NYSE: BUD), for example, is one of the largest and most dominant liquor stocks in the world; yet its share price has remained virtually flat for the past decade and has fallen nearly 40% in the past five years.

It’s a hard pill to swallow, even for the most patient investors; however, there seems to be some positive momentum in the business that could make the title’s next decade much more lucrative for investors. Here’s why Anheuser-Busch deserves a second look.

Image source: Getty Images.

Beer is a wonderful business model

Anheuser-Busch is the 800-pound gorilla of the beer industry. Its more than 500 brands include Budweiser, Bud Light, Corona and Stella Artois and are sold worldwide. The company holds an estimated 38% share of the global beer market, making it the largest brewer in the industry.

It has the big operations to make beer at competitive prices, and it can demand high-end storage space in stores and venues. The company’s gross profit margin ranges between 50% and 60%, almost as good as some tech stocks.

BUD Gross Profit Margin Chart

BUD gross profit margin given by Y charts.

Anheuser-Busch is also a robust, cash-generating business; it converts 15 cents of every revenue dollar into free cash flow that management can use as needed. You can see in the graph above that margins and free cash flow generation have both tended to decline over the years. There are two main reasons for this model.

Recognize Challenges

The company made massive acquisitions to become the giant it is today. Anheuser-Busch merged with InBev in 2008, a $52 billion cash transaction that created Anheuser-Busch InBev. It then went on to do an even bigger merger in 2016, joining forces with SABMiller in a $107 billion cash deal.

Anheuser-Busch’s balance sheet was decimated, particularly after the SABMiller merger, leaving the company with more than $110 billion in debt in the summer of 2018. Not only did management have to find a way to bring two big companies together separate, but all of this resulting debt bears interest payments, which take away from the free cash flow that the business creates.

COVID was another setback as the business saw its business suffer during the shutdowns when many restaurants and bars closed. Management said beer volume fell 13.4% in the first half of 2020 when lockdowns peaked, resulting in a 12% drop in year-over-year revenue and a 24% decline. % of EBITDA (earnings before interest, taxes, depreciation and amortization).

Encouraging signs of recovery

Anheuser-Busch saw its business start to rebound in the second half of 2020. Volumes were up 1.8% year-over-year. This momentum continued into 2021 with beer volumes up 17% in the first two quarters – recovering from this weak first half of 2020 – and third quarter volume increased by 3.4% d one year to the next.

With business back to normal, investors can begin to focus on the company’s ongoing efforts to improve its balance sheet. It took actions such as cutting its dividend to free up cash to pay down its debt. Additionally, it sold its Australian business unit for $11.3 billion in 2020.

Total debt has now fallen to just over $90 billion in June 2021, its latest financial update. Anheuser-Busch plans to continue to repay its debt and has structured it so that there are few maturities until 2024.

Takeaway for investors

In other words, with activity rebounding from the shutdowns and the balance sheet slowly improving, the outlook is finally starting to look up for investors. The stock trades at a forward price-to-earnings ratio of 20, which doesn’t sound cheap but remains below its historical average of 23. Earnings growth is expected to accelerate as the company deleverages and reduces its interest expense, which totaled nearly $5.9 billion over the last twelve months. Analysts expect earnings per share to grow about 11% a year over the next three to five years, and market sentiment toward the stock could improve as debt declines.

Remember that Anheuser-Busch is the leader in the traditionally highly profitable beer industry and its struggles have been self-inflicted rather than a poor business model. Wounds can heal over time, and with the hang-ups in the company’s rear-view mirror, it looks like the beer giant’s future days may be its brightest in a long time.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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