DJ Anheuser-Busch Stock Gets Upgraded on Debt Outlook -- Barrons.com
By Teresa Rivas
Anheuser-Busch InBev stock has underperformed lately, but RBC Capital Markets argues that the pessimism is overdone.
Where we were: Anheuser-Busch InBev (ticker: BUD) recently recommitted to lowering its debt profile.
Where we're headed: RBC says the move is a prudent one, and the lagging shares can make up some distance.
Budweiser may be the king of beers, but heavy is the head that wears the crown.
Shares of Anheuser-Busch InBev have lost more than a third of their value in the past 12 months. Part of the problem is sales: North American beer volumes have been lumpy of late, while weakness in emerging markets has also been a problem. AB InBev is hardly the only beer maker to take a hit.
Another issue is its balance sheet: AB InBev halved its dividend in October, in part to give it more flexibility to pay down debt. That may be a wise long-term move, but it was an unwelcome change for a company that was at one time one of the most generously yielding firms in the industry.
However, the company is serious about deleveraging, as evidenced by its recent "corporate debt diet," including selling new bonds to allow the company to pay down its debt over a longer period.
Some investors are still wary, but RBC Capital Markets' James Edwardes Jones argues the "dangers of AB InBev's indebtedness have been overstated." He upgraded the shares to Top Pick status, from Outperform, with a $75 price target on Tuesday.
AB InBev was down 1.2% to $72.79 in recent trading.
His increased bullishness rests on the recent refinancing, which he calls sensible. The decision "has replaced peaks of debt repayment with a smoother schedule which, at current exchange rates, should be doable from free cash flow, while significant appreciation in the U.S. dollar would be manageable."
AB InBev gets a lot of its business from emerging markets, but its debt is largely in U.S. dollars and euros. Thus, the strong U.S. dollar has meant little movement on its leverage, while cash flows take a hit because of sales in weaker currencies.
That said, Jones argues that the new repayment schedule gives him more confidence in the firm's leverage, even if the dollar continues to appreciate. He believes "the level of debt is comfortably under control given AB InBev's relatively non-cyclical nature."
Jones said investors can think about the stock's valuation in terms of price-to-earnings ratio, which is cheap compared with the sector -- rather than enterprise value to earnings before interest, taxes, depreciation, and amortization, which is relatively expensive.
The company isn't the only alcohol provider to struggle in the past year. Changing consumer tastes have favored premium and craft brews, leaving some bigger brands in the lurch -- yet another example of how consumer staples stocks have been thrown for a loop and have lost some of their safe-haven luster.
Make the Connection
Constellation Brands (STZ) has been getting upgrades too.
Not every analyst is optimistic about AB InBev.
Write to Teresa Rivas at teresa.rivas@barrons.com
(END) Dow Jones Newswires
January 22, 2019 11:28 ET (16:28 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.