University of Kentucky Student Research
Kyle Hundsdorfer
FIN 485
TVA Investment Challenge
Instructor: Dr. Brad Jordan
Sector:
Consumer Goods
Industry:
Beverages-Brewers
Anheuser-Busch InBev BUD
4/7/2014
Recommendation: BUY
Current Price: $105.70
Margin of Safety: 19.9%
Target Price: $132
Highlights
Key Statistics
Economic Moat
Narrow
Wide
Market
Cap
P/E
P/B
Div. Yield Current Ratio
Short %
172.27B
17.68
3.40
3.80%
< 1%
0.73
 Leading position in many of the
world’s top beer markets
The Company
 Strong brand image
 Excellent financial health
 Experienced management
Overview
Inside this report:
Economic Moat
2
Peer Analysis
3
SWOT Analysis
4
Valuation
5
Anheuser-Busch InBev (NYSE: BUD), commonly known as AB InBev, is a brewing
company that produces, markets, distributes, and sells beer. It is one of the world’s
top five consumer products companies. With a portfolio of well over 200 different
beers, BUD is the world’s largest brewer. Based in Leuven, Belgium, BUD is highly
geographically diversified, with a balanced exposure to developed and developing
markets. The company has operations in 25 countries worldwide. Through various
acquisitions, BUD has been able to capture the leading market share position in
many of the world’s premier markets.
Business Model
Risk Factors
5
Investment Recommendation
6
BUD offers a portfolio of over 200 different beers around the world. It includes
global brands such as Budweiser, Corona, and Stella Artois; international brands
such as Beck’s, Leffe, and Hoegaareden; and local brands such as Bud Light, Skol
Brahma, Antarctica, Quilmes, Modelo Especial, and Michelob Ultra, just to name a
few. BUD’s potential is not limited to just beer. With the decrease in volume demanded for beer in the past few years, the company has introduced the “Rita”
family. This includes Lime-A-Rita, Straw-Ber-Rita, Cran-Brr-Rita, Mang-O-Rita,
and Raz-Ber- Rita. With the introduction of these new beverages, BUD has
captured some of the
2
Anheuser-Busch InBev BUD
Kyle Hundsdorfer
FIN 485
TVA Investment
Challenge
Instructor: Dr. Brad
Jordan
consumers who are looking outside the beer category. With the increase in craft beer
demand in North America recently, BUD is also well positioned in the market to maintain its market share. It owns craft breweries such as Shock Top, Redbridge, Goose
Island Brewery, Kona Brewing Company, and Fordham Brewing company.
BUD has proven that it is expert in acquiring brands, generating synergies, and
generating returns for shareholders. In 2013, the company successfully completed its
combination with Grupo Modelo. The company has realized $460 million in cost synergies to date. It is expected to realize $1 billion in cost synergies by 2016. In January
2014, BUD announced an agreement to reacquire Oriental Brewery, the leading brewer in South Korea.
Economic Moat
As the world’s largest brewer, BUD has a wide economic moat driven by a combination
of scale, operating leverage, and leading market share. BUD is responsible for seven of
the world’s top beer brands: Bud Light, Budweiser, Corona, Skol, Stella Artois, Brahma, and Beck’s. The acquisition of Grupo Modelo was complete at the end of 2013,
exposing BUD to a 70% market share in Mexico. The company also has leading market positions in other profitable beer markets, including the United States (47%), Canada (40%), Brazil (68%), Argentina (76%), Belgium (56%), and the United Kingdom
(17%). The company’s scale in these markets has allowed it to spread out its overhead
and marketing costs across far greater volumes then any of its competitors. Because of
this scale, BUD has had operating and gross margins far above its competitors. BUD
also has strong partnerships with the MLB, NFL, and FIFA. These relationships allow
BUD to market and strengthen its already dominant brand image.
Along with its overwhelming market share in many countries across the world, BUD’s
62% economic interest in Ambev, Brazil’s leading brewer, also provides an economic
moat for the company. Ambev’s distribution system has set the standard in Brazil and
creates substantial barriers to entry. With 27% of the company’s revenue coming from
this market, these barriers to entry are key to BUD’s growth in South America.
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4/7/2014
Management
BUD has a management team that is composed of 15 leaders, many of whom have been with the company for
over 20 years. The CEO, Carlos Brito, has spent 25 years with the company or its predecessors. He has held his
current position since 2005. The CFO, Felipe Dutra, has spent 24 years with the company or its predecessors
and has held his current position since 2005. The Chief Marketing Officer, Miguel Patricio, has spent 26 years
with the company or its predecessors, and has held his current position since 2012. Luis Fernando Edmond is the
Zone President of North America and the CEO of Anheuser Busch. He has spent 24 years with the company or its
predecessors, holding his current position since 2008. BUD’s management is very knowledgeable of the beer industry and is dedicated to the company, as shown through its collective years of experience. A significant por- tion
of AB InBev's senior management consists of the Brazilian team that bought Brazil-based Brahma in 1989,
merged the company with Antarctica in 1999 to form AmBev, and then merged with Interbrew in 2004 to create
InBev. The team has significant experience dealing with the nuances of integrating acquired firms with differing
corporate cultures.
Peer Analysis
Competitors
When it comes to competition in the beer industry, BUD is certainly in a class of its own. BUD’s main competitors worldwide are Molson Coors Brewing Company (TAP), Heineken (HINKF), and SABMiller
(SBMRY). Competition with these companies varies in intensity across different regions of the world.
Among the four breweries, BUD leads in most metrics. Its market capitalization is over double any of its competitors. This size difference explains the discrepancy between BUD and its competitors in terms revenues. Where
BUD sets itself apart from the competition is its operating margins. For the last six years, BUD has had operating
margins of at
least 30%. None of BUD’s competitors had operating margins of over 25% in the year 2013.
Key Statistics
BUD
Market Cap
HINKF SBMRY
TAP
172.27B
40.59B
82.29B
10.91B
Forward P/E
17.68
17.38
21.22
14.60
P/B
Dividend
Yield
EV/
EBITDA
3.40
2.73
3.27
1.32
3.80%
1.71%
0.97%
2.49%
12.61
10.81
18.02
18
3.21
2.35
2.82
2.52
PEG
A comparison to Heineken, SABMiller, and
Molson Coors is shown on the left. As shown,
BUD completely dominates the market with
respect to market capitalization. Its forward
P/E ratio is about average compared
to the industry. Another area where BUD has
the upper hand is with its dividend yield of
3.80%. Compared to its competitors, BUD’s
EV/EBITDA ratio is highly favorable. This is
due to the company’s strong financial health.
4
Profitability
BUD
Anheuser-Busch InBev BUD
Kyle Hundsdorfer
Challenge
Instructor: Dr. Brad
Jordan
TAP
Operating Margin
32%
15%
25%
11%
Profit Margin
59%
38%
70%
39%
ROE
32.79%
12.62%
13.92%
6.85%
ROA
6.58%
4.48%
4.86%
1.88%
FIN 485
TVA Investment
HINKF SBMRY
From a profitability standpoint, BUD sets the bar for the competition. In almost every category BUD is better its competitors and for the most part by a good amount.
BUD’s ROE of 32.79% is impressive especially when the next highest is SABMiller
with 13.92%. Because of BUD’s strong positions in North and South America, it has
been able to keep margins high with its cost cutting strategies. BUD’s profitability is
the main reason it has continued its role as the world’s leading brewer.
SWOT Analysis



Large market share
Profitability compared to industry
Highly geographically diversified between emerging and
emerged markets

Strong brand image
Weaknesses


Declining demand for beer
Amount of exposure in emerging markets
Opportunities




World Cup in Brazil
Expansion in South Korea
Increasing market share in non-beer markets
Possible acquisition of Molson Coors
Threats



Economic/political uncertainty in emerging markets
Regulation
Decreasing market share
Strengths
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4/7/2014
Valuation
Taking figures from Value Line, I used a dividend discount model for my valuation. My
valuation extended for 15 years. For the first
5 years of the model, I used 20.5% growth
rate for the dividend and 11.5% growth rate
for EPS. From the 6th year onward, I used a
straight line depreciation to decrease both
the dividend and EPS growth rates to 5%.
The margin of safety for every source I used
was below our goal of 20%. However, with
BUD’s wide economic moat, strong management, and exemplary profitability, I believe
this stock is a promising investment.
Source
Valuation
Margin of Safety
Yahoo!
$118
10.42%
Valueline
$120
11.92%
Bloomberg
$119
11.18%
P(DDM-DDM)
$132
19.92%
$122.25
13.54%
Average
Risk Factors
The future outlook for BUD is bright. With this bright future, however, there are considerable risks that BUD faces. One substantial risk posed to the company is a further decrease in demand for beer. Recently, the demand for
beer has decreased while the demand for wine and spirits has increased. This shift could have an effect on profits
in the future. As mentioned earlier, BUD has tried to counteract this trend with the invention of the “Rita” family.
Also, any negative publicity that may be connected to any of BUD’s brands will have a negative effect on future
profits.
Secondly, approximately 52% of BUD’s 2013 revenue came from emerging markets. These markets include Brazil, Argentina, China, Mexico, Russia, Bolivia, Paraguay, and Ukraine. Any economic or political uncertainty that
may take place in any of these markets may have an adverse effect on profits in the future. Also, government regulation could have an impact on profits.
Lastly, BUD may not be capable of acquiring other companies for the near future. This issue will place pressure
on growth to come organically within the company. In the past, BUD has been able to boost revenues and
margins through acquisitions and mergers. BUD will have to prove that it can sustain growth on its own.
6
Anheuser-Busch InBev BUD
Kyle Hundsdorfer
FIN 485
TVA Investment
Challenge
Instructor: Dr. Brad
Jordan
Investment Recommendation
BUD is most definitely deserving of at least a 5% investment in our portfolio. The consumer goods sector usually is a sector that we try to avoid as value investors due to
high competition. However, BUD’s wide and sustainable economic moat is undeniable.
With such high market shares in the major beer profit pools in the world, BUD’s
growth for the future seems promising. The company’s positions in markets such as
the United States, Mexico, Brazil, and Canada are enticing and will continue to drive
up profits. When compared to its competitors, BUD looks strong with a wide economic
moat, experienced management, and profitability. Also, with the FIFA World Cup being held in Brazil in the summer of 2014, BUD’s tight grip on the market should provide an increase in revenues for the year. Finally, BUD is trading far below its implied
fair value. With my calculated margin of safety sitting around 30%, this stock has the
potential to provide high returns for our portfolio.
Sources
Uni ve rsi ty

Bloomberg terminal

www.sec.com/edgar

www.morningstar.com

www.finance.yahoo.com

www.valueline.com

www.ab-inbev.com
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Student
Re se arch