Back in December I was fortunate enough to be chosen by the editors to provide BusinessWeek magazine a value stock idea for their annual investment guide issue. My selection, beer giant Anheuser-Busch InBev, was controversial at the time due to the just-completed buyout of A-B by Belgium’s InBev, but despite how disappointed many were with the deal (especially in St. Louis where I resided for ten years) the stock of the combined company was too cheap for me to ignore.
Nearly nine months later I figured I would publish an update to that investment idea given that many people read the BusinessWeek issue and some surely wound up purchasing the stock. Shares of Anheuser-Busch InBev (AHBIF) have more than doubled in value (+119%) since the issue hit newsstands, soaring from $21 per share to a current $46 quote.
The reasons for such a large move have turned out to be the very same arguments I made when I made the pick; the stock was deeply oversold after millions of new shares were sold to finance the A-B deal, and profit margins have increased smartly thanks to the synergies captured from the merger.
The company recently reported financial results for the first half of 2009. While revenue rose only 3% (the beer market is fairly mature in most parts of the world), normalized EBITDA rose 22% thanks to margin expansion. In fact, gross margin rose from 50% to nearly 53%, and EBITDA margins rose from under 30% to over 36%. Simply put, thus far the company has succeeded in hitting its post-merger operating goals.
The doubling of the share price has increased the equity market value of A-B InBev to $73 billion. Combined with $53 billion in net debt (much of which was borrowed to buy A-B and will be repaid in coming years with free cash flow), the stock’s enterprise value sits at $126 billion, or 9.8 times current run-rate cash flow. My valuation model back in December pegged a fair value price for the company at 10 times cash flow, so the stock now appears close to fair value of ~$47 per share.
As a result, Anheuser-Busch InBev stock is no longer dirt cheap. For investors who own large positions, it may be wise to consider paring it back. I have not sold it completely for my clients because there remains decent upside over the long term as the firm’s massive debt load is repaid. Every dollar of debt that is repaid (assuming constant operating cash flow) will translate into more value for equity holders.
Although the easy money has already been made, I think the stock will do fairly well longer term as the company de-levers its balance sheet and further integrates the two beer giants into one company. Translation: the stock is no longer a screaming buy, but rather a very solid hold.
Full Disclosure: Clients of Peridot Capital were long shares of AHBIF at the time of writing, but positions may change at any time