Serious Comeback Potential from this Global Brewer
Stocks with scant analyst coverage often offer opportunity for individual investors to exploit market inefficiencies. The small-cap arena is usually the most fruitful place to uncover these opportunities, but every now and then a firm with a larger market capitalization will fail to get the attention it merits from Wall Street.
One firm has fallen out of coverage in the United States simply because it was acquired by a rival across the pond in Europe. As a result, only four analysts currently provide earnings estimates. There is some international coverage, but in aggregate, analysts keeping tabs on the company is woefully inadequate given the firm has a market cap of $76 billion and is one of the five largest consumer goods firms in the world.
The firm in question is Anheuser-Busch InBev (NYSE: BUD), one of the largest brewers in the world. Belgium-based Inbev acquired St. Louis-based Anheuser Busch, also known endearingly as the “King of Beers”, in the middle of 2008. The newly-formed company established an American Depository Receipt on the New York Stock Exchange last year to again reach out to U.S. investors.
A-B InBev’s global reach is simply astounding. The company sells beer in 23 countries, boasts 152 beverage plants around the globe, and holds a number one or two market position in 19 countries. The North American, Latin American and European regions account for 91% of last year’s $36.8 billion in sales. Thanks to the buyout of the “King of Beers,” the mature North American market drives more than half of AB-Inbev’s profitability and provides the firepower to sell Budweiser, Stella Artois, and 13 billion-dollar beer brands into faster-growing regions like Brazil and parts of Central and Eastern Europe.
#-ad_banner-#Despite exposure to appealing emerging markets, A-B InBev is not a play on top-line growth. Sales will be lucky to grow a couple of percent a year given the firm’s total size — not to mention the fact that beer has been around for thousands of years. In that time, local markets have had sufficient time to consolidate to a handful of leading brands, with A-B InBev, SABMiller and Heineken possessing a stranglehold on global market share. Despite the slow growth, these firms still have pricing power to demonstrate there is a competitive advantage that goes with industry dominance.
Instead, an investment in A-B InBev is a play on continued merger synergies and the reduction of a massive debt (currently $47 billion) that InBev needed to acquire Anheuser-Busch. In terms of synergies, management expects to wring out $2.25 billion in costs, which is close to double its original estimates. This stems from traditional cost cutting as well as working capital improvements, such as more quickly collecting payments from customers.
Debt elimination should boost cash flow as interest expense decreases and frees up capital to repurchase shares and boost a lagging dividend, currently yielding 0.8%. .Last year, free cash flow was $7.7 billion, or nearly $5 a share — impressive, even with the high debt level.
A primary way to value a company is by discounting its future cash flows back to calculate its present value. At the current share price, the market is discounting a very low cash flow growth rate of only about +1% a year. This is unreasonably low and means the stock is significantly undervalued because analysts and investors aren’t giving AB-InBev any credit for its cost cutting plans and debt lowering that will improve its bottom line.
Action to Take —–> If A-B Inbev can grow cash flow in the mid single digits, then the shares are undervalued by at least -40% from current levels. This includes a compelling downside cushion given consumers drink beer regardless of the economic climate. Overall, it’s a good time to get in on AB-InBev, before analysts wake up to the fact that it has a very compelling risk/reward tradeoff right now.