I wasn’t crazy about the international conglomerate InBev purchasing Anheuser-Busch back in 2008, forming what is now Anheuser-Busch InBev (BUD). The ticker symbol still represents the core American brand, but the acquisition has created a clash of cultures that hasn’t served the company well.
The new owners sold off the company’s theme parks. Employees fled the company, save for a few executives. BUD began slicing expenses. It changed a friendly corporate culture — which included company contributions to employee pension plans — into a stern, unfriendly one. Perks like tuition reimbursement, severance packages and even employee Blackberries were discontinued. This was good for BUD financially, as the company cut its debt nearly in half. Yet it also seems to have changed how the company thinks and markets beer in the process.
The most recent quarter delivered mixed results. Total revenue at BUD increased 3%. Beer volume fell 1.3%. Brazil isn’t loving beer as much as it used to, with volumes down 5%. Earnings did increase from $1.16 to $1.36, but much of this was due to a Mexican acquisition.
Things just aren’t the same. Yet, with long-term projected earnings growth of just 7%, BUD trades at almost 22x FY13 estimates. It’s not even like this is a go-to dividend play as it only yields 1.3%. I have no idea what investors are thinking in bidding this company stock so high. Sure, its cash is flowing very nicely and always has. But despite a dividend that has doubled since 2010, there’s still a lot of FCF left over. BUD seems more intent on acquisitions just to keep growing — at a sluggish pace.
And look at BUD’s competitors. Molson Coors Brewing Company (TAP), is merely 6% of market cap of Anheuser. Earnings are stagnant, only growing about 4% per year, yet the stock trades at 13x forward estimates. SABMiller (SBMRY) trades at 20x FY13 earnings with 8.5% revenue growth. Boston Beer Co. (SAM) which, at $3 billion in market cap, is tiny compared with the other two behemoths, trades at 45x estimates on near-term earnings growth of only 20%. Craft Brew Alliance (BREW) is only one-tenth the size of Boston Beer, and trades at 62x projected earnings. Mega-beverage provider Diageo (DEO) which sells spirits and liquor as well, is only growing earnings in the 8-12% range yet trades at 19x earnings.
It’s as if investors are drunk on the products of all these companies, because I see nothing to support these valuations at all. So BUD isn’t the only one you should sell — all these companies deserve the boot. There’s no reason for them to trade at these levels, the dividends aren’t worth it, and you can find dividends with less overvaluation risks elsewhere.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at firstname.lastname@example.org and follow his tweets at @ichabodscranium.