Anheuser-Busch InBev (BUD) was recently added to the Value Line Investment Survey
on January 28, 2011. To many investors this company and its well-known ticker, BUD, remind them of one of the most revered businesses in American capitalism, Anheuser-Busch, which was in the Survey for years. However, nostalgic investors should take note; this recent addition is not the same corporation, and is actually the Belgian-Brazilian multinational (formally InBev) that acquired the iconic American business. It is currently one of the top five consumer products companies. While the company can trace its roots back to Den Hoorn brewery in 1366, the global conglomerate is more accurately the result of a series of mergers over the past 20-plus years that culminated with InBev’s $52 billion purchase of Anheuser-Busch in 2008. As part of the deal, InBev adopted Anheuser-Busch’s name. The company launched an American Depository Receipt (ADR) program, on a 1-for-1 basis, on July, 1, 2009. BUD ADRs trade on the New York Stock Exchange.
Anheuser-Busch InBev, is the world’s largest brewing company and accounts for roughly a quarter of the world’s beer volume. The company manages over 200 beer brands, including four of the top ten beer brands worldwide. AB InBev’s most notable brands are Budweiser, Stella Artois, and Beck’s. The company’s tremendous size gives it considerable sales and marketing might, which coupled with its distribution network, allows Anheuser-Busch InBev to maintain its lead market position in the highly-competitive sector. It also helps AB InBev obtain lower prices for its packaging and ingredients. At present, this sales-driven conglomerate has established a leading market position in 19 different markets around the globe.
The management that has been behind Anheuser-Busch InBev’s ascension to the global King of Beers has a keen focus on cost-cutting. The current management has developed a bit of a reputation for acquiring companies and then instituting strict cost-saving initiatives that impact the recently-acquired businesses’ corporate culture. After the merger of Anheuser-Busch and InBev was completed, InBev’s management quickly got to work divesting non-core assets and looking for other ways to pare back expenses in Anheuser-Busch’s operations. One of the most common strategies is using zero-based budgeting, where there is no budgeting base; therefore, every expense has to be justified. Moreover, management has implemented other programs at the base in St. Louis, as it attempts to increase efficiency and bring down expenses across the business. There is no arguing with the results, though. The company has expanded its profit margins, while bolstering its cash flows over time. The cost-cutting strategies have been particularly successful in developed markets. These markets generally have uninspiring growth prospects for consumer-goods companies. Consequently, cost-cutting, in the form of layoffs or efficiency programs, are often utilized to bolster profitability. Anheuser-Busch InBev also utilizes an incentive structure in an effort to motivate its management to focus on bottom-line goals. All told, the current management has a long track record of success executing financial prudence. In fact, the merger between Anheuser-Busch and InBev continues to result in cost synergies. The brewer likely topped $2 billion worth of cost savings in 2010. However, investors should note the synergies related to Anheuser-Busch’s purchase have mostly been realized.
The near-term picture for AB InBev is currently uninspiring. Most notably, poor weather in Brazil and high unemployment in the U.S. have weighed on demand in two of its key markets of late. Demand continues to be soft in other markets, as well. In response, the company has developed a brand expansion strategy. The brewing giant aims to extend its lead U.S. brands (Budweiser and Bud Light) into new markets to further enhance their brand recognition over the coming years. Additionally, a few of the company’s older brands (such as Leffe and Hoegaarden) offer strong growth potential thanks to the brewer’s expanded reach. AB InBev’s unmatched distribution network gives it leverage to further push its brands into new markets. The goliath has targeted Asia, Latin America and parts of Europe for its brand expansion strategy. This initiative will likely remain the cornerstone of management’s growth strategy for the foreseeable future.
The brewing industry is in the midst of an extended period of consolidation as global beer titans, like Anheuser-Busch InBev, look for new markets to expand their operations. The trend started in a few mature markets and has now spilled into virtually all emerging markets. Strong sales in Asia, Africa, and Latin America have helped these businesses offset weakening volumes in their primary markets. Expanding into these markets also allows brewers to diversify their revenues. These markets currently make up less-than-half of AB InBev’s business, but will likely become increasingly important in the years ahead, given their thirst for new beers. The current management team has been particularly successful finding takeover targets in its tenure. It has been able to tack on new breweries from all over the world to its operations. Furthermore, once acquired, management has been able to integrate these businesses, while still achieving various synergies and increasing economies of scale. Looking ahead, we would not be surprised to see Anheuser-Busch InBev swallow up a few other brewers, likely in emerging markets, over the coming years.
The company took on a large amount of debt when it purchased Anheuser-Busch. As a result, its balance sheet is now more highly leveraged (roughly 60% of total capital) than it has been historically, at present. However, the brewer’s profits should easily cover its interest payments, while the company works this balance down. Moreover, it appears that the current management will remain dedicated to strengthening AB InBev’s finances. Thus, the company will likely continue to shore up its balance sheet by utilizing its strong cash-generating capabilities in the near term.
Investors have not been particularly excited about Anheuser-Busch InBev’s prospects since the landmark merger. However, recent strategic initiatives, coupled with a recovery in the global beer market, should give investors something to cheer about in the not-too-distant future. In fact, we believe its efforts to expand its brands into new markets will help sales and earnings advance at a nice clip over the long term. Moreover, income-oriented investors may want to take note that the board recently increased AB InBev’s payout from $0.38 a share to $0.80 a share. All told, the company is a well-run operation that will likely continue to tap new growth opportunities.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.