Anheuser-Busch InBev (BUD)/(ABI) reported third-quarter results that fell slightly behind our forecasts for volume growth and EBIT margins, but the results were overshadowed by the announcement that the dividend has been cut in half in order to focus capital allocation on debt repayment. Although we expected a negative short-term reaction from the market, we think the move was largely anticipated and has removed a significant overhang from the stock. If investors now focus on the fundamentals of the business, we believe significant value may be unlocked from AB InBev’s shares. We are lowering our fair value estimates to $118 per ADR from $124 and to EUR 103 per ordinary share from EUR 106 to account for the volume weakness, but we believe that this is an attractive entry point to the stock.
Third-quarter organic revenue growth of 4.5% is above par for large-cap consumer staples companies in the current environment. Volume growth was soft, up just 30 basis points year over year; Brazil again underperformed, with beer volume down 3%. This, we believe, was mostly driven by macro pressures and a contraction in the market, but Heineken (HEINY) clearly took share in the quarter, and while we believe Brazil will remain a rational oligopoly in the medium to long term, competitive pressures may add to the volatility over the next year or two. We are sticking to our belief that 5% organic revenue growth is a reasonable assumption for Brazil in the medium term.
Philip Gorham, CFA, FRM does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.