Black Book Presentation Today (BUD)
We added Anheuser-Busch InBev to our Long Bias List. The beer industry has moved to protect margins in the wake of COGS inflation through aggressive price increases, leading to weak volume demand in 2022. Management’s price increases are offsetting the cost pressures, with some loss of volume – a tradeoff the company is used to making. The beer category is now showing signs of stabilizing volumes.
The company has reduced leverage from more than 5x at the outset of the pandemic to 4x. The EV/EBITDA multiple has not changed, making the equity more attractive. Relative to the market BUD is an outperformer in Quads 1 and 4. Its strongest absolute performance historically has been in Quad 1. More focus on international growth and a flipped Fx outlook would benefit AB InBev. We will vet whether the company can recover margins after years of contraction and enter a positive earnings revision cycle. We will also refresh our outlook for the beer sector in 2023 and BUD's prospects specifically, by examining:
- Geographic trends
- Competition with other alcoholic beverages
- The outlook for on-premise vs. off-premise
- Cost drivers
- Price increases and demand elasticity
- International growth hot spots
- And more
Event Details:
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Canadian Beer (TAP)
Total beer volumes in Canada increased 13.7% in January, accelerating from a 3.6% decrease in December. Volumes in January 2022 were particularly weak during the Omicron surge and declined 11.1%. Domestic beer volumes increased 14.6%, improving from a 2.2% decline in December. Imported beer volumes increased 6.4% in January, improving from a 12.2% decline in December. Beer volumes have been declining for several years in Canada. For Molson Coors, the Canadian on-premise channel is still trailing pre-pandemic levels.
Flu monitor (PRGO)
The CDC estimates that there have been at least 25 million illnesses from the flu this season through the week ended February 25. The flu had surged since Thanksgiving but has declined in most areas despite the Christmas and New Year’s holidays. The flu sometimes has two peaks, but influenza A(H3N2) continues to be the main subtype (97%) making a second peak less likely. If the trend continues this season’s flu will have started early and ended even earlier.
The cumulative hospitalization rate is the second highest observed for the eighth week of the year going back to 2010-11, following only the 2017-18 season. The in-season cumulative hospitalization rate is still lower than the end-of-season hospitalization rates for all but five pre-COVID-19 seasons (2014-15, 2016-17, 2017-18, 2018-19, 2019-20). Several macro factors did not go Perrigo’s way over the past three years. Management’s 2023 EPS guidance provides a credible commitment and the first step of recovery. Perrigo’s near-term outlook remains a show-me-story with a focus on execution. With depleted inventory levels at retail for Cough & Cold, a better outlook for Oral Care from lower freight rates, additional Infant Formula production capacity (better for revenue growth and margins), and continued synergies from HRA, Perrigo's 2023 is set up to put the challenges of 2022 behind. The three-year outlook is well above expectations and reflects management’s confidence in both recovery and growth.
