This note was originally published February 27, 2013 at 10:43 in Consumer Staples
Anheuser Busch InBev (BUD, ABI BB) reported Q4 earnings this morning and we won’t dwell on the results versus consensus - suffice it to say that European sell side analysts make their U.S. counterparts look like the NASA team that put Armstrong on the moon. The results were consistent with our slightly below consensus estimates, but there are several things we want to highlight from the release, particularly for investors that are scratching their heads and looking for “value” in staples (we do the same on occasion as we observe some stocks continuing to make multi-year highs – KMB, CLX, we are looking at you.)
ABI posted 8.8% constant currency organic revenue growth (against a +5.7% comp) – volumes improved 0.6% reported and declined 0.1% on an organic basis so much of the growth came from price/mix. This top line performance (+7.2% for the full year) shames most staples companies and is a result that 80% of the executives in our sector would forego important body parts to realize. The company delivered some leverage on this excellent top line result, with currency neutral EBIT +10.7% in the quarter – very few staples companies (PM and HSY come to mind) were able to leverage top line growth in any meaningful fashion.
In 2012, ABI generated $6.36 per share in FCF – at $92 per BUD share, 14.5x FCF is actually below the staples range that we generally reference (15-20x FCF). Global multinational companies such as KO and CL trade in excess of 20x FCF and ABI certainly qualifies to be in that company. As we mentioned above, ABI surpasses both those names in terms of recent top line performance. We think a valuation case can be made for standalone ABI right here, right now.
We have become less vocal on STZ (we still expect upside toward $50 per share and a high probability of the deal gaining regulatory approval), but see an asymmetric risk/reward profile and a DOJ that has been willing, at least based on the initial filing, to suspend logic. Based on the valuation case we made above, we think it can be argued that shares of ABI currently reflect no benefit from the transaction being approved.
In prior reports, we have mentioned the reason why ABI was likely willing to forego so much in the U.S. in pursuit of Grupo Modelo – the simple answer is, the rest of the planet. We don’t usually go in much for revenue synergies, but we do see an opportunity for ABI to drive Modelo’s brands globally. Further, even with the synergy estimate for the transaction upped to $1 billion, we point investors back to the transaction between InBev and Anheuser-Busch, where the original synergy estimate was $1.5 billion annually by 2010 and the company delivered $2.25 billion by 2011 (deal was announced mid '08). The same math would imply the potential for another $500 million in synergies at Modelo, and we think we can make the case that the old Anheuser-Busch was run more efficiently than is Grupo Modelo. Finally, one thing we don’t doubt is the ability of ABI management to cut costs – it is a core competency.
Finally, and this is a “softer” statement – buying staples companies that are integrating deals generally works – investors get a period of outsized EPS growth from the combination of deleveraging (in many cases) and merger synergies. The income statement flexibility resulting from the business combination provides some certainty with respect to earnings visibility. Make no mistake, this isn’t TAP management integrating a deal, ABI management has a long and envious track record in terms of business integrations.
So, bottom line for us that we can make a valuation case, have long been supportive of the rationale and regulatory likelihood of the Modelo deal, and are willing to bet on what we see as a superior management team going forward.