Major indices finish lower amid GE earnings disappointment >>> READ MORE

Should I Buy BUD Stock? 3 Pros, 3 Cons

BUD stock acquiring Oriental Brewery is a step in the right direction


Anheuser-Busch InBev (BUD) announced Monday that it was reacquiring South Korea’s largest beer company, Oriental Brewery, for $5.8 billion. So far the news appears to have made a positive impression on BUD stock, sending it up roughly 1.5% in the past few days.

bud-stock-budweiser-stockSome believe this is the precursor to something much bigger. Speculation revolves around a multi-billion merger with SAB Miller (SAB), the world’s second-largest brewer.

What does that kind of rumor mean for Budweiser? I’ll have a look at the pros and cons of owning BUD stock.

BUD Stock Pros

Pricing Power: Anheuser-Busch operates seven geographical regions. With the exception of Asia/Pacific, all of them experienced declining organic volumes for the first nine months of fiscal 2013 ending October 31. Yet four of the six were able to deliver positive organic revenue growth. Company-wide revenues grew 2.8% in the first nine months of the year against a 2% decline in organic volume. This kind of pricing power is good news for BUD stock.

Asia/Pacific: As I mentioned in the previous paragraph, Budweiser’s Asia/Pacific region is the superstar when it comes to growth. In the first nine months of 2013, it grew organic volumes year-over-year by 9%, revenue by 18% and normalized EBITDA by 32%. The acquisition of Oriental Brewery adds another $500 million in EBITDA, almost doubling BUD’s EBITDA in the region. As the market matures, Bud’s 18% margins will move into the 40s, delivering significant profits and pushing BUD stock even higher.

Budweiser: Although Anheuser-Busch’s flagship brand lost 4.3% market share between 1999 and 2012, things are looking brighter in China, Brazil and the U.K., where Q3 volumes grew by 8.1%. CEO Carlos Brito’s plan since the merger in 2008 was always to make Budweiser a truly global brand. Certainly the Oriental Brewery acquisition will help boost Budweiser’s popularity in South Korea. Anything the company can do to slow the general move toward liquor and wine is definitely good news for BUD stock.

Bud Stock Cons

Beer Market: In the span of 13 years, beer’s market share in the US has dropped by 720 basis points to 48.8%. The biggest beneficiary: distilled spirits, which gained 6.1% market share between 1999 and 2012. Harry Schumacher, editor of Beer Business Daily, says it’s “as bad as it’s ever been.” Craft brewers are hitting BUD on one side while vodka and whiskey manufacturers do the same on the other. Eventually, this ongoing trend will be Anheuser-Busch’s undoing. Fortunately, for BUD stock, this likely won’t be something you or I will experience in our lifetime.

Debt: Anheuser-Busch says its net debt at some point in 2014 will be less than two times EBITDA. At the end of June 2013, it reported net debt of $43 billion — 43% higher than at the end of 2012, and a net debt ratio of 2.75. Much of the new debt was to pay for its acquisition of the remaining 50% of Grupo Modelo that it didn’t already own. Assuming the company increases EBITDA by 6% in 2014, it will need to reduce its net debt by $11 billion or 26%. That’s going to be tough to accomplish given the $11 billion in free cash flow and $3.6 billion in dividends to pay on BUD stock. Something’s got to give, and it’s not going to be the dividends.

SABMiller: The two families that control 51% of BUD stock have gotten incredibly rich through M&A moves, including the original merger of Interbrew and AmBev in 2004, the Anheuser-Busch buy in 2008 and the Grupo Modelo acquisition in 2013. By heaping on debt instead of giving up equity, they control a business worth more than $162 billion. Rumors continue that the two biggest players in beer will hook up in a $100-billion deal that gets BUD into Africa and smaller Latin American countries like Colombia and Peru. While I have no doubt Carlos Brito can make it work, it’s going to be a regulatory minefield, taking BUD’s eye off the ball for a considerable amount of time. This could be one deal too many.

BUD Stock Verdict

At the end of the day, I’d have no problem buying BUD stock. Carlos Brito has more than proven himself as CEO of a global company. However, I’d be more excited if BUD were going after Boston Beer (SAM) or something different like Brown-Forman (BF.B), whose family ownership makes it a very tough catch, but one that would change its growth trajectory in a big way.

As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

©2017 InvestorPlace Media, LLC