Anheuser-Busch InBev (NYSE:BUD) has had a rough year. It’s been a difficult time for consumer staples stocks in general, with the other big 3G Capital play, Kraft Heinz Company (NYSE:KHC), also tanking in recent months. This has left investors wondering: Is the 3G takeover-and-cut-costs model dead?
The answer, I’ll argue, is a definitive no. 3G is still an expert at running a lean, high-profit-margin operation. And global beer is a great business in which to execute this model. Put aside a few trend-setting urban enclaves, most consumers around the world want cheap, branded beer. And Anheuser-Busch is the leader in delivering that. And with BUD stock’s sell-off over the past year, the company now offers compelling value for investors.
The Dominant Player
In the United States, you hear all about craft beer and changing consumer preferences. This is a wildly overblown media phenomenon, as we’ll see below.
On a global scale, Anheuser-Busch sells 30% of all the beer that is consumed (based on revenue). From the deserts of Africa through the tropical islands in Southeast Asia to the bars in the Midwest, Anheuser-Busch gets three out of every ten dollars spent anywhere in the world on beer. Even more incredibly, due to its tremendous profitability, Anheuser-Busch earns 50% of all the profits in the global beer industry — half!
The company sold more than $55 billion of beer last year, earned a net income of almost $8 billion and sports a market cap in excess of $160 billion. It’s hard to believe some of the stories you see about Anheuser-Busch being an obsolete or fading company. It’s still a giant, and it can easily spend money to buy up or otherwise take care of competition.
Speaking of that subject…
Craft Beer Is Slowing Down
The Washington Post reported earlier this year that craft beer’s “Buzz Is Wearing Off“. Meanwhile, investors are still inundated with stories about how upstarts are going to dethrone the big brewers such as Anheuser-Busch.
But the facts simply don’t reflect this. The Washington Post article noted that more craft operations shut down in 2017 than in any other year since the financial crisis. Even during a booming economy, the glut of me-too new breweries is simply getting to be too much. Consumers want choice, but at some point, enough is enough.
That’s reflected in overall production volumes as well. Craft beer’s growth decelerated to just 5% last year. That’s its slowest growth rate in ages — and a far cry from recent double-digit numbers. The overall United States beer industry shrank 1% last year, so craft beer is still taking share, but at a much slower rate than you’d think from listening to the hype. As it is, independent breweries account for just 13% of the market and are growing at 5% a year — that’s not a recipe for the death of Anheuser-Busch anytime soon.
Anheuser-Busch’s Debt Load Is Manageable
The other big complaint about BUD stock is that the company simply has too much debt. It’s easy to look at the company’s $100 billion of loan indebtedness and think that it is unsustainable. But that would overstate the risks.
Several factors mitigate the debt problem. For one, the vast majority of the debt is at fixed interest rates (under 4% on average) and not due within the next five years. So the company has plenty of time to integrate the game-changing SABMiller acquisition before it has to roll over and refinance the debt at potentially higher interest rates.
Two, beer sales tend to be fairly recession-resistant. It’s unlikely that Anheuser-Busch’s sales will drop significantly, even if the global economy really trails off in coming quarters. And, finally, given the prestige behind 3G’s management team and its place as the world’s major brewer, it will have legions of institutions that want to lend to it.
BUD Stock Is Great, but Is It the Best?
I find BUD stock to be a compelling value at today’s prices. Beer and liquor companies tend to trade at a price-to-earnings ratio around 20 or slightly above that. So, Anheuser-Busch at 18.5x forward earnings and offering a mouth-watering 4.9% dividend yield, certainly appeals. Once investors get over their interest rate and craft beer fears, it wouldn’t take much to get BUD stock to jump from $100/share to $125/share.
That said, I don’t own any BUD stock yet. That’s because another brewer, Molson Coors Brewing Company (NYSE:TAP) looks even more attractive. That company, like Anheuser-Busch, just made a major acquisition and, as a result, is weighed down by similar excessive debt fears. Molson Coors is also more exposed to the North American market, allowing investors to overreact more intensely to the supposed craft beer threat. TAP stock is down to 14x trailing and 13x forward earnings, which is simply an incredible value for a major brewing stock.
Another interesting option in the alcohol space would be Chile’s Compania Cerveceria Unidas (NYSE:CCU), which controls more than 60% of the market there. Investors have punished that stock for Latin America’s troubles, dropping the forward PE ratio back under 18. As one of the largest independent national breweries left, CCU is a compelling takeover target for a global powerhouse wanting to dominate a new market.
All that said, BUD stock looks great here. The dividend is amazing, and there is a good chance for sizable capital gains as well. But do consider the industry as a whole. BUD stock is far from the only value on sale now.
At the time of this writing, the author owned shares of TAP, KHC, and CCU. He had no position in BUD stock.