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Anheuser-Busch InBev NV (ADR) (BUD): Is There Still A Play Here?

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As soon as I got my post-MBA job at Anheuser-Busch InBev NV (ADR) (NYSE:BUD) in 2011, I became a shareholder. At that time, up-side potential for the stock seemed obvious. There were huge synergies to be exploited from the 2008 take over of Anheuser Busch. Besides, it was clear ABInBev’s super-skilled top management would lower the company’s debt faster than many expected

At the time I acquired my first Anheuser-Busch InBev NV (ADR) (NYSE:BUD) shares, the company was trading at around $40 per ADR and my target price was $85 per ADR. Now, the company trades around $95, but the brewer has also increased its intrinsic value though very interesting and sizable (synergy-rich) deals. The most significant deal that ABInBev has recently completed was the acquisition of Grupo Modelo, the owner of the popular Corona brand. This particular acquisition gives ABInBev further room for worldwide growth.

Let’s make a review at this quarter’s results for the company and, hereafter, I will compare AB InBev to two competitors in order to see if there is more upside coming from the company at current prices.

ABInBev’s First Quarter Results.

1) Clearly the most salient (negative) surprise was Brazil.  Since 2011 Anheuser-Busch InBev NV (ADR) (NYSE:BUD) has been increasing prices incessantly. Price hikes combined with weak consumer confidence and accelerating food inflation have kept volumes under pressure. The company’s typical (mega strict) cost management should help margins going forward, but I think we shall not see the pricing boom we have seen in the last two years.  Hence, I would not expect anymore aggressive EBITDA margin expansion from the Brazilian operation.

Anheuser-Busch InBev NV (ADR) (NYSE:BUD)2) Modelo’s $1 billion cost synergy target will not play a role in Anheuser-Busch InBev NV (ADR) (NYSE:BUD)’s results until the second half of the year. Probably, actual synergies will end up closer to $2 billion but that money will finally be seen in 2014/2015 and most of the synergies are already taken into account in the current price.

3) US margins set to improve: While Q1 North America margins declined for a fourth consecutive quarter, I expect margins to expand over coming quarters as i) strong pricing trends continue, ii) distribution costs moderate as new liquid innovations are expanded into more breweries.

3) The company has kept its Focus on Free Cash Flow yield, not just volumes: Anheuser-Busch InBev NV (ADR) (NYSE:BUD)’s 2013 5.5% Free Cash Flow Yield is expected to grow up to 6.5% in 2014. This expected 6.5% yield is unparalleled in the Consumer Sector so even with Brazil growing volumes slower than expected, ABInBev has not lost focus on shareholder value.

Is it there up-side left?

To answer this question we need to look at valuations. Let’s compare Anheuser-Busch InBev NV (ADR) (NYSE:BUD) with its biggest competitor, SABMiller (LSE:SAB) and an American Classic, Molson Coors Brewing Company (NYSE:TAP).

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