AB InBev's Q3 Better Than Expected Amid Lockdowns
We continue to believe AB InBev is significantly undervalued high-quality business with a cost leadership position in the beer industry.
In what will be welcome good news for shareholders, AB InBev BUD reported a decent third quarter, with price/mix driving both revenue growth and gross margins higher than our estimates, which were above PitchBook consensus. If the higher prices passed through in the third quarter stick for the remainder of the year, it is likely that gross margin degradation will not be quite as pronounced as we had feared. We have slightly increased our full-year revenue and margin estimates, but this has no impact on our $90 per share fair value estimate. We continue to believe AB InBev is significantly undervalued high-quality business with a cost leadership position in the beer industry. With high levels of debt on its balance sheet, however, earnings are likely to be more sensitive to bad news, and the stock may continue to be volatile should inflation linger or economic growth slow.
Third-quarter net revenue growth of 7.9% year-over-year was a surprise to the upside, beating our 6.0% estimate and even Carlsberg’s impressive 7.0% growth in the same period. Volume growth was slightly lower than our forecast, at 3.4%, but this is most likely due to the strong price/mix of 4.3%. Although we would like to see an in improvement in volume trends, particularly in North America, in the current inflationary environment, we think the strong price/mix is good news because it will help to mitigate the margin pressure from rising costs. In spite of the upside to revenue, consolidated third-quarter gross margin slipped by 142 basis points, and the EBITDA margin by a further 32 basis points. It remains our base case that cost inflation will continue into the second half of next year before abating. In light of the pricing that ABI was able to pass through this quarter, however, we have lifted our full-year revenue estimate by 1 percentage point to 14% and our gross margin estimate by 50 basis points to 57.8%. These assumptions require third-quarter momentum to be carried into the fourth quarter.
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