Anheuser-Busch Does Well in Q2 Despite Headwinds

With much upside remaining to our valuation, it is too early to raise a toast to Anheuser-Busch InBev's BUD deleveraging, but the firm's execution in the second quarter was respectable. Against the backdrop of the obliteration of its on-premises business for several weeks, the firm beat our estimates on volume and margins and lowered its net debt balance. We view this a reminder to the AB InBev bears that despite the multiple headwinds facing the company, this is a well-managed and competitively advantaged business that should deliver strong cash flow generation for many years to come. We retain our wide economic moat rating and $96 fair value estimate.

Second-quarter volume fell 17%, which was better than our estimate of a near 21% decline. By region there were some quite wide variances, with upside to our estimate in North America, where volume fell just 5.5% and the sell-through to retailers was flat. There was also downside to our estimate in the Middle Americas region, however, where volume fell over 36%. The strong performance in North America mirrors the respectable numbers just reported by Molson Coors, indicating that industry volume was more robust than we had expected. It seems likely that this was due to a substantial shift to the off-trade during the lockdown and to consumers returning in significant scale to on-premises locations when lockdown measures were lifted. Risk remains in North America, however, given that some states have reinstated social distancing measures in recent weeks. We anticipate a 2% regional volume decline in the second half of the year, with a strong 5% rebound next year.

Markets in the Middle Americas region have been hit very hard by the closure of the on-trade. Volume in Mexico and Colombia declined 38% and 31%, respectively, in the second quarter, and while pricing was positive, negative mix more than offset this and contributed to a greater decline in regional revenue than we had expected.

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