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Stock Analyst Update

Tough Quarter for Anheuser-Busch InBev

We are retaining our $126 fair value estimate and our wide moat rating.


 AB InBev (BUD) missed our revenue expectations in the third quarter due to soft volumes in North America, but a solid performance by Ambev came to the rescue to a certain degree. We are retaining our $126 fair value estimate for the ADRs, along with our wide economic moat rating. The market now appears to have regained confidence in both Brazil and the SABMiller acquisition, although attention will now turn to weakness in the U.S. After a strong rally this year, the stock is now trading close to our fair value estimate. ABI raised its guidance for the SABMiller synergies to a total of $3.2 billion, up from $2.8 billion previously, and we suspect management has kept this trick up their sleeve, to be released with bad news.

That occasion came in the third quarter. Following a similar narrative from Heineken yesterday, AB InBev blamed the weather for its weak volumes in North America, and the hurricanes in the region almost certainly contributed to a 5.6% decline in divisional volumes (management attributed a reduction in EBITDA of 2 percentage points to the impact of the hurricanes). Still, it seems likely that competitive pressures are equally to blame for the share and volume performance. Secular pressures from the shift to craft beer are likely to continue contracting ABI's U.S. volumes, and we expect the business to be managed for cash flow optimization, rather than growth, in the medium term.

While the U.S. continues to drag, ABI's growth engines remain in Latin America and Africa, and these regions posted mixed results in the third quarter. Brazil grew by almost 10% organically, which represented a welcome turnaround after several quarters of volatility. South Africa is still performing below our medium-term expectations, but with the market still at an early stage of development, we have conviction that the beer volume decline of 2.5% is not representative of the medium-term volume and mix opportunity, driven by demographics and premiumisation.

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Philip Gorham does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.