As Anheuser-Busch’s (NYSE:BUD) shares trade just above their multi-year lows, should investors consider buying the stock? There are good reasons why the brewing giant’s shares have tumbled. In addition to the impact of the novel coronavirus, sales declines caused by aggressive cost cutting have negatively impacted Anheuser-Busch stock.
3G Capital, which has invested heavily in Anheuser, has implemented aggressive cost-cutting measures at the company. In the short-run, those measures boosted Anheuser-Busch stock. But over the long-haul, the reduction of its marketing expenditures has hurt its sales and earnings growth.
Add in the coronavirus, and the company is facing almost a “perfect storm” of headwinds. With live venues like bars and stadiums closed, the brewer has lost a fairly large chunk of its sales.
With this factor at play, two different trends are affecting the company and Anheuser-Busch stock. On the one hand, Anheuser-Busch is a consumer products company. With Americans stockpiling food and beverages during the lockdown, in theory the company’s sales to consumers who have to stay home should be boosted. On the other hand, through its sales of beer to outside venues, it’s exposed to lost sales due to “social distancing.”
But these issues may be already more than priced into Anheuser-Busch stock. And with a favorable risk/return proposition, the shares could be a screaming buy at today’s prices.
Past Issues Catch Up With Anheuser-Busch Stock
As I mentioned above, the company’s issues didn’t start with the coronavirus. So far this year, the stock has declined by around 48%. But since 2016, the shares have fallen from prices above $125 per share to around $42.50 per share today.
What’s driving this long-term decline in value? Lay the blame on 3G Capital. Discussing Kraft Heinz (NASDAQ:KHC) back in February, I detailed 3G’s involvement with that company and its disastrous results. In short, 3G’s use of zero-based budgeting helped boost the bottom line for Kraft Heinz. But over the long-term, 3G’s aggressive cuts to the company’s marketing budget hurt its sales.
The same thing happened with Anheuser-Busch; 3G cut its costs and pursued mergers. And cost cutting ultimately hurt the company. Meanwhile, the rise of craft brewing negatively impacted demand for the company’s legacy brands, such as Budweiser.
Financial engineering got the better of Anheuser, destroying shareholder value. But now the pandemic is giving the company yet another challenge.
The Coronavirus Is Just a Short-Term Challenge
At first glance, it appears that consumer products companies shouldn’t be too badly hurt by the pandemic. But about a third of Anheuser Busch’s sales come from “off-premises consumption.” The latter term refers to beer purchased at stadiums, bars, restaurants, etc. With these businesses shuttered due to the pandemic, the company’s top and bottom lines have been meaningfully negatively impacted by COVID19.
And, as InvestorPlace’s Matt McCall wrote in a column published on May 5, those lost sales won’t come back. In other words, it’s not as if bars can have belated Saint Patrick’s Day or Cinco De Mayo celebrations later this year. Also, many venues may continue to see reduced foot traffic, even as things “return to normal.”
Yet I don’t think these issues will further impact Anheuser-Busch stock. With states starting to reopen, demand for the company’s products have likely bottomed. Sure, off-premises sales may take a while to bounce back. And the competition from craft beer for at-home sales will probably continue as well.
But these concerns are more than reflected in the price of the stock. The company’s forward price-earnings ratio, based on analysts’ average 2020 earnings per share estimate, of 22.5 isn’t exactly low. But analysts are predicting big earnings declines in 2020. Even though the company’s outlook appears to be uncertain, I think its profits will bounce back sooner than anticipated.
As Morningstar’s Philip Gorham wrote in a research note last month, Anheuser-Busch could see “little long-term impact” from the pandemic. With the company’s strengths in overseas markets, I think it’s reasonable to assume that it will meet analysts’ average 2021 EPS estimate of $3.26.
Based on Anheuser’s current forward P/E multiple, that means its shares could be trading for around $73.25 per share a year from now. That would be a nearly 70% return for investors who buy the stock today.
Anheuser-Busch Stock Is a Screaming Buy
The pandemic has affected the brewing giant’s near-term profitability. But these headwinds are more than reflected in its current share price. Since the company’s profits can rebound in 2021, the shares could move nearly 70% higher in the next year.
Here’s the bottom line: Due to its minimal downside risk and its high potential to rally, Anheuser-Busch stock is a screaming buy at today’s prices.
Thomas Niel, an InvestorPlace contributor, has written single-stock analysis since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.