Strong Q1 for AB InBev, Beating Revenue Estimates

Anheuser-Busch InBev BUD ABI reported a strong first quarter that beat our estimates on volume and revenue. Margins fell slightly year over year, in line with guidance, but this does not detract from what was a good quarter overall. The president of AB InBev's North America zone, Michel Doukeris, will replace Carlos Brito as CEO on July 1. We have pulled forward our recovery expectations and make no change to our $90 fair value estimate or our wide economic moat rating. Although the shares have recovered somewhat since full-year 2020 results were reported, we still see upside and think margin expansion next year could reassure investors that deleveraging will continue organically.

First-quarter volume grew 13.3% on an organic basis. This was well ahead of our estimate of an 8% increase, and we think this reflects pent-up demand in the on-trade in markets that have been coming out of lockdown restrictions. The upside to our estimates was driven by Asia-Pacific volume, up a stunning 64.1%, and Middle Americas volume, up 12.2%. This is consistent with global competitors Carlsberg and Heineken, which both reported strong volume growth in Asia, as China emerged from the lockdown measures that annihilated volume in the first quarter last year. We have probably underestimated the strength of the pent-up demand, and we now assume that as markets open back up, demand will snap back quickly. However, we still believe that it is likely to be next year before prepandemic trends resume, as we expect a small proportion of the on-trade to have gone out of business during the lockdown period.

A key question for all consumer product companies this year, and AB InBev in particular, is margin development. Raw material costs are likely to rise for most manufacturers, and AB InBev clearly saw some inflation, as the gross margin fell 122 basis points despite positive price/mix. This was offset by operating leverage from higher volume.

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