To my surprise, Anheuser-Busch (BUD) has been hit harder than most during the ongoing COVID-crash with the stock dropping from $82 to $42 as of writing. Liquidity has faded from both the stock and corporate bond market which has pulled BUD much lower.
That said, I highly doubt that demand for the company’s brands is likely to decline. If anything, it will rise as millions of Americans and people all over the world look for enjoyable ways to spend their time at home. While sales did slump 10% in China and restaurant/bar demand will certainly decline, many liquor stores are reporting booming sales. Recent national Google Trends search volume for “Liquor Stores” concurs:
As you can see, search volume for “Liquor Stores” (implying interest in nearest locations) has increased five-fold over the past week.
Interestingly, we can also see this trend when using major U.S. alcohol retailers:
Indeed, it is well-known that alcohol sales tend to increase during recessions, particularly for low-cost beers that producers like Anheuser and Coors (TAP) specialize in. In my opinion, the quarantine will have a similar but exaggerated impact as millions will be temporarily off work and stuck at home.
While the company may have lowered forward guidance due to the virus. I believe that revenue may actually surprise to the upside. Even more, the stock is very cheap with a TTM “P/E” of 9X and a dividend yield of 5.5%. Given the company is a consumer staple and has more than adequate capitalization, I believe it is extremely undervalued.
To be fair, I am not bullish on equities today and believe the market as a whole is headed lower. Since most stocks are highly correlated today due to what seems to be a lack of liquidity, BUD is likely to fall with the market. That said, I believe we are reaching a point where long-term investors could look for fire-sales in companies that can weather a prolonged storm. I believe that BUD is one of the few companies worth buying.
The Financial Impact of COVID on AB InBev
In case you’re wondering, the company’s Corona sales are believed to have declined due to the widespread sales slump in China, not because of its name. Importantly, the company saw revenue decline approx. $285 million in China and expects to see EBIT decline $170M in that region. The company announced that its Q1 earnings would likely fall 10% due to this.
In order to maintain liquidity in case of an extreme crisis, the company recently took out a $9B revolver which brings its total cash-on-hand to $16B. This gives the company ample liquidity after paying its $3B bond that matures this year.
With bars and restaurants globally seeing severe declines or outright closures, that segment of demand for the company’s beer will decline substantially. The fact is that most beer sales occur in grocers in the U.S. and even in the U.K. While I cannot be certain, I believe that it is fair to assume this skew is larger for low-cost brands that BUD focuses on. Given the considerable increase in liquor-store search volume, I believe that in-store sales growth will offset restaurant/bar sales declines.
The one area where BUD will take a hit is refinancing its debt. The company currently has a BBB credit rating and $100B in total debt. The spread on bonds of this rating has risen from 1.3% to 4.25% in a matter of weeks which will likely increase the company’s interest expense drastically if rates remain at this level and the company needs to refinance. I believe that this is one of the major factors that has pulled BUD lower.
That said, the company’s bond maturity profile is long term with most coming due five years from now and the rest over the next 25 years. See below:
Fortunately, the company has little debt maturing soon, so the short-term crash is unlikely to materially negatively impact it. Still, it will not be able to safely sell more bonds if need be.
The company is in a strong financial position today with a times-interest-earned of 4.8X and a Financial Debt to EBITDA of 3.45X:
This implies that the company would need to see its total interest expense or total debt at least double before its financial situation would be concerning. That is unless people stop drinking the company’s brands which seems incredibly unlikely.
BUD’s Value Opportunity
Despite the low immediate financial risk, the stock is extremely cheap. It has both a low “P/E” and “EV/EBITDA” and is even trading close to its book value:
As you can see, BUD is trading at roughly half of its normal valuation by all metrics. The company’s fair-value forward “P/E” may not have been 22X, but I would argue that it deserves the standard 15X forward “P/E” at the least. This would make the company 25% undervalued with a price target of $51.
Importantly, similar valuation statistics are found in Anheuser’s competitor Coors. Thus, BUD is not necessarily undervalued to its peer, but both companies are undervalued given the environment.
The Bottom Line
Overall, it seems clear that most Americans (and likely people around the world) will be purchasing extra goods from Anheuser-Busch over the next few weeks. Data suggests that there has already been a considerable spike in liquor-store search interest and, given BUD specializes in lower-cost bulk-buyer-friendly items, I believe the company will see revenue and earnings beat expectations. Restaurant and bar sales will likely decline considerably, but I believe this will be offset by gains from grocers.
I doubt BUD will be materially harmed as much as many other companies and their recent short-term financing essentially guarantee that BUD will not run into liquidity issues. Even more, while the company has high debt, it also has more than enough earnings to pay its debt. While the stock may fall lower, I believe it is a solid long-term “buy” with a price target of $51-75.
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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in BUD over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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