Anheuser-Busch InBev Earnings: Green Shoots of Optimism That the Worst of Inflation May Be Over

Anheuser-Busch InBev ABI reported a quite strong third quarter that showed signs that its algorithm may be reverting to our medium-term forecast. The green shoots of optimism offered by this report that inflationary pressures may be easing and that margins stabilizing are good news. We retain our wide moat rating and $90 fair value estimate for the ADRs, but we raise our valuation of the Brussels-traded share class to EUR 85 from EUR 83 due to the slightly stronger U.S. dollar. We believe there is still material upside to the stock from its market value on Oct. 31.

ABI’s consolidated third-quarter volume fell by 3.4% year over year, slightly below our forecast, although the firm was cycling a strong third quarter last year and the two-year stacked volume is flat. North America was the laggard, with volume down 17.1% primarily due to the backlash to a Bud Light marketing campaign in the U.S. Although the brand appears to be impaired, we think the worst case is that ABI will cycle through the volume contraction by the end of the first quarter of next year, when we expect regional volume to revert to a low-single-digit decline. ABI recently signed a multiyear agreement to market Bud Light as the official beer of the Ultimate Fighting Championship, reviving a partnership it first made around 15 years ago. The best-case outcome is that this marketing effort will spark a recovery in share, but this is not our current base-case assumption.

In other regions, volume was broadly in line with or slightly better than our forecasts. Third-quarter organic revenue growth was 5.0%, marginally above our steady state forecast, indicating that the worst of the inflation spike may be over. Cost of sales (up 6.0%) still grew faster than revenue, and the consolidated organic EBITDA margin contracted by 29 basis points, but with producer price indexes now in decline and much of the inflationary pressure already passed through, ABI seems likely to have improved pricing flexibility next year.