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This Bud’s Not for You While Debt Swallows Free Cash Flow

Anheuser-Busch InBev (NYSE:BUD) stock has had a rough time. BUD stock has fallen over 40% in the past year, although it is actually up over 63% in the past six months. But it is going to be a while before AB InBev can dig out of the damage that the novel coronavirus pandemic has put on its business worldwide.

Corporate building with Anheuser Busch (BUD) logo on it
Source: legacy1995 /

I suspect that it is going to take at least a year and probably longer for AB InBev to work through this higher debt load. In effect, it is waiting for the pandemic to die down, for restrictions to be lifted, and a vaccine to be spread throughout the world.

Only then will restaurant, retail, and related venue alcohol sales growth start to kick back in.

However, the market already senses that the light at the end of the tunnel, so to speak. That is why BUD stock has started to turn around. But it is going to be a while before its financial health starts to buttress this optimism.

Debt and Cash Flow Trouble

For example, in the past six months to June 30, the company has had to dramatically increase its debt. Gross debt has increased from $97.5 billion, including its short-term debt, to more than $107.7 billion, or by 10%.

That debt load has put a severe strain on the company’s cash flow as well. For example, AB InBev reported that its cash flow from operations in the first six months of this year was $4.39 billion.

However, after interest expenses of $2.2 billion, tax payments of $1.4 billion, and some credits, its net cash flow was only $1.12 billion. That was down significantly from last year when cash flow was $4.9 billion.

But here is the problem. The company’s capital expenditures cost another $1.58 billion. So, in effect, its free cash flow was negative – an outflow of $380 million.

Therefore, for all intents and purposes, the company is just standing in place with its higher debt load. Moreover, it has until 2024 to significantly reduce this because that is when major debt repayments are due to kick in.

What Analysts Are Saying

A poll of 25 analysts by Seeking Alpha has an average forecast of $45.25 billion in revenue for 2020. However, their average estimate for 2021 shows an 8.9% increase to $49.3 billion. If this $4 billion in revenue feeds through to free cash flow, the company has a chance of eventually digging out of its debt trouble.

Seeking Alpha also shows that analysts’ earnings expectations climb 58% from $1.99 per share to $3.15 in 2021. The same is true with the Yahoo Finance poll of analysts on AB InBev. Their estimates rise 60.6% from $2.01 EPS in 2020 to $3.23 in 2021.

In other words, hope springs eternal here. But let’s think about this a little. AB InBev now has a ton of debt after having taken on $10 billion more in the last six months. At the rate of growth in earnings and expected FCF that these analysts’ earnings imply, it will take at least two years just to reduce the debt by $10 billion. That leaves the company where it was before the coronavirus hit.

Therefore the company is likely going to have to continue selling assets. In the past six months, AB InBev sold its Australian breweries just to raise $10 billion. Sales like this, although they reduce cash flow, will likely continue in order for the company to reduce its massive $110 billion debt pile.

What’s Next With BUD Stock?

Right now BUD stock trades for 29 times this year’s expected earnings. However, taking into account the 60% rise in earnings next year, its P/E multiple is just 18 times next year’s earnings. And that is after the stock has risen over 63% in the past six months.

Analysts should continue to see improvement in the company’s financials leading into 2022. I suspect BUD stock will continue its climb as this happens.

However, until AB InBev’s debt starts to fall, I suspect the stock will be in a holding pattern.

On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Mark Hake runs the Total Yield Value Guide which you can review here.

Article printed from InvestorPlace Media,

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