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3 Reasons Why You Must Hold on to AB InBev (BUD) Stock for Now

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Anheuser-Busch InBev SA/NV (BUD - Free Report) , alias AB InBev, has been displaying strength lately, owing to robust sales trends, persistent growth of global brands and strong outlook for 2019. The company is witnessing robust sales growth on the back of improving trends in key markets and continued premiumization in the majority of its markets. Further, the three global brands — Budweiser, Corona and Stella Artois — continue to witness solid growth.

Driven by these positives, this Zacks Rank #3 (Hold) stock has gained 26.1% year to date, outperforming the industry’s growth of 18.2%.

 



However, we cannot ignore softness in the U.S. beer industry, and tough macroeconomic conditions in Argentina and South Africa, which remain headwinds. Further, currency headwinds and commodity cost inflation continue to weigh on the bottom line.

Let’s delve deeper and find out reasons why we should retain this stock now.

Strong Global Brands & Premiumization

In first-quarter 2019, consolidated revenues for the AB InBev’s global brands improved 8.5% globally and 14% outside their respective home markets. Budweiser witnessed revenue growth of more than 15% outside the United States, driven by strong growth in China, Brazil, the U.K. and Colombia. Corona, the most premium global brand, sustained its growth momentum, with revenues improving 15.7% outside its home country, Mexico. Most of this growth was driven by strength in Brazil, Colombia, the U.K., China and Canada. Stella Artois revenues grew 8%, aided by double-digit revenue growth in more than 30 countries, including Brazil, South Korea and Mexico.

Furthermore, AB InBev’s High End Company delivered revenue growth of nearly 20%. Strength in global brands reflects the company’s potential to grow, backed by improving trends in key markets and continued premiumization in the majority of its markets.

Robust Top-Line Performance & Outlook

In first-quarter 2019, AB InBev delivered the second straight sales beat and its fifth positive sales surprise in the trailing six quarters. Moreover, the company registered organic revenue growth of 5.9%, courtesy of 4.6% rise in revenues per hectoliter (hl) and strong volume growth. Top-line results were also aided by global premiumization and ongoing revenue management initiatives. Further, healthy performances in key markets — including Brazil, China, the United States, Europe, Colombia and Nigeria — boosted the top line. Total organic volume advanced 1.3%, with own-beer volume rising 1% and non-beer volume up 4.9%.

Furthermore, the company anticipates delivering strong top-line and EBITDA growth for 2019, backed by solid brand performance and robust commercial plans. Driven by increased focus on category development, it expects to deliver balanced top-line growth between volume and revenue per hl.  Net revenue per hl growth is likely to exceed inflation while costs (sum of cost of sales and SG&A) are expected to be below inflation. Premiumization and revenue management initiatives are likely to aid revenue per hl growth.

Cost-Savings on Track

AB InBev is on track to reach its synergy and cost-savings target of $3.2 billion that was announced in August 2016, following the acquisition of SABMiller. Of this, nearly $547 million was reported by SABMiller as of Mar 31, 2016, and about $2,491 million was captured between Apr 1, 2016, and Mar 31, 2019. Clearly, the company has captured about $3,038 million of synergies since the announcement. Capture of synergies and cost savings in the first quarter were nearly $100 million, mainly driven by business integration efforts. The company expects to achieve the remaining synergies of nearly $150 million by the end of 2019.

What Holds Us Back

Despite strong top-line performance graph, the company is persistently witnessing lower-than-expected bottom-line results due to adverse currency translations and commodity cost inflation. First-quarter 2019 marked its third straight earnings miss and fourth negative surprise in the last six quarters. Higher commodity costs mainly stemmed from increased aluminum and barley prices. Additionally, cost of sales increased 6% organically while cost of sales per hl grew 4.6%.

For 2019, the company projects cost of sales per hl to increase in a mid-single digit as currency and commodity headwinds will only be partly offset by the cost management initiatives.

Additionally, some of the company’s key markets, particularly Argentina and South Africa, continued to suffer from tough macroeconomic conditions in the first quarter, which led to lower consumer demand.  In South Africa, revenues were hurt by lower volume, which stemmed from the shift of the Easter holiday to the second quarter of this year, alongside lower consumer demand. Ongoing macroeconomic challenges and a continued segment mix shift toward the premium segment (where the region still has lower market share) impacted consumer demand. In Argentina, volume declined in mid-teens in the first quarter due to the difficult macroeconomic environment.

Moreover, the company continues to battle soft beer trends in the United States as consumers are gravitating toward wine and other healthier options, which are hurting volume. Although AB InBev delivered revenue growth of 1.6% in the United States in the first quarter, driven by execution of the commercial strategy, total and own-beer volume in the region declined 1.2% each.

Conclusion

Despite these headwinds, a detailed review of the company’s growth strategies suggests that the stock is definitely poised to regain traction in the future. This view is further supported by our Momentum Score of B and a long-term earnings growth rate of 8.8%.

Three Better-Ranked Stocks in the Beverage Industry

Ambev S.A. (ABEV - Free Report) has a long-term earnings growth rate of 7.2% and a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

PepsiCo Inc. (PEP - Free Report) currently has a long-term earnings growth rate of 7% and a Zacks Rank #2.

Campari Group (DVDCY - Free Report) , also a Zacks Rank #2 stock, has a long-term earnings growth rate of 7.5%.

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