This Round's on Me

A look at beer company AB InBev

Anheuser-Busch InBev also commonly referred to as AB InBev is one of the worlds largest breweries with over 500 brands in the portfolio. In fact, one in every four beers is brewed by AB InBev. So next time you are at the pub knocking back are few pints you are likely consuming an AB InBev beer.

Here is a list of some of the beer brands that the company owns that you are likely familiar with:

• Becks
• Budweiser
• Castle Lager 
• Corona 
• Stella Artois

The company has a secondary listing on the JSE and thus is easily accessible to South Africa investors. The company currently has a market capitalisation of $97.42 billion, or roughly R1.83 trillion and trades under the ticker symbol ANH on the JSE.

The share price has had a sell-off from the R1200 levels and is currently trading around R1050. This drop in price was largely due to a negative market reaction after a controversial Bud Light advertising campaign turned sour. This coupled with rising input cost pressures have led to a share price weakness, however the counter is still up year to date and has performed well one a 12-month basis.

Revenue growth of the company over the past three years has been steady with revenue growing by 15.82% in 2021 and a less impressive 6.43% in 2022. Revenue for 2022 was $58 billion placing the stock at a price to sales of 1.92.

Looking at the bottom line the company has grown net profit by 231% in 2021, although this is largely due to coming off a low base after COVID and has grown revenue  by 27.83% in 2022. For the 2022 financial period revenue was $5.97 billion placing the company on a price to earnings multiple of 15.23. This is well below historic PE multiple the stock typically trades at.

Looking to the balance sheet we can see that the company has $213 billion in assets and $129 billion in liabilities equating to a net asset value of $84 billion. The stock thus trades at a premium to its net asset value. The company has a relatively large amount of debt on the balance sheet and the capital structure of the business thus has a significant debt component. The interest coverage ratio is currently acceptable but low at 3.25 and the current ratio concerning at 0.67.

Over the past 5-years gross margins have averaged 59%, operating margins 28% and net margins 10%. One strong positive for me of the company is the free cash flow generation of the business which has typically exceeded net income. This is further evident by the fact that the price to free cash flow of the business is currently 8.46% and much lower than the price to earnings ratio which uses net income as the denominator.

For yield seeking investors the stock has an average dividend yield of 2.09% over the past 5 years. I currently dont hold a position in the stock however I think the beer industry is one that is resilient and defensive. When times get tough customers are unlikely to stop drinking beer but will likely look for cost savings in other areas of the spending basket. The one thing that does shy me away from this stock however is the balance sheet. The large amount of debt in the current high interest rate environment will be a significant burden and suppress earnings. However, should rates come down this could result in a boost of earnings for the company.