Anheuser-Busch InBev

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 2/5

A global brewer with a diverse portfolio of beer and beyond-beer brands across various geographic regions, facing a highly competitive industry, complex operations, and macro-economic headwinds.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview Anheuser-Busch InBev (AB InBev) operates as a global beer company, with a portfolio of over 500 beer and non-alcohol beverage brands, including global brands Budweiser, Corona, and Stella Artois, as well as multi-country brands like Beck’s, Leffe, and Hoegaarden. The company is geographically diverse, with significant operations in North America, South America, Europe, the Middle East and Africa, and Asia Pacific.

The company’s success stems largely from a combination of scale, brand recognition, and efficient operations.

Revenue Distribution:

North America: Remains a key region, with high market share, particularly in the premium segment, although it may experience pricing pressures.
Middle Americas: This region shows strong profitability, with higher pricing, and more profitability. The region is less prone to price or volume swings, and hence less risky in nature.
South America: This area is driven by volumes, as their income tends to be lower. Currency volatility also makes this region a higher risk.
EMEA: Europe, the Middle East, and Africa are also key revenue streams for the company, with a mix of emerging and developed markets. Europe has been stable and slowly declining, while Africa is seeing a good volume growth.
Asia Pacific: While volumes are still small, there is more focus on building premium brands in this growing region. There has been an increasing premiumization in the region, leading to increased growth in the long term.

The company has also been focusing on non-alcoholic beverage brands, which are gaining popularity and contributing a solid percentage of profits.

Trends in the Industry

Global Market Consolidation: The beer industry has seen increased consolidation, with a few major players like AB InBev, Heineken, and Carlsberg, accounting for a substantial portion of global sales.
Premiumization: Consumers are increasingly opting for higher-priced premium and craft beers over mainstream lagers.
Health and Wellness Trends: There is a growing trend toward low and non-alcoholic beverages, reflecting consumer health consciousness.
Digitalization: The industry is seeing an increase in online sales and the use of digital platforms for marketing and distribution.
Supply Chain Issues: The pandemic and geopolitical tensions have disrupted the supply chains, causing increased cost and availability issues with raw materials.
Changing Consumer Preferences: Trends change very quickly as consumers are exploring different tastes and flavor profiles with different alternatives to beer

Margins:

Despite the revenue increases, profitability has been impacted by increasing input costs and operational expenses.
Gross margins are high, which gives companies enough room to increase their earnings.

Competitive Landscape The global beer market is characterized by intense competition from both major international brewers and local and craft breweries. The company faces competition from:

Major international players: Heineken and Carlsberg, which also have strong global presence.
Local and regional breweries: Many local breweries, especially within the craft and artisanal segment, are gaining popularity, taking the share away from the major players.
Alcoholic beverage providers: Companies making alcoholic beverages that are not beer have been increasing their sales share due to shifting consumer preferences.
Non-alcoholic beverage providers: These are a major threat because younger generations have been shifting to non-alcoholic alternatives.

What Makes AB InBev Different?

Global Scale: As a global brewer, AB InBev has a diverse geographic presence with extensive distribution networks and scale, which allows them to produce and distribute large volumes of products at competitive cost.
Diverse Portfolio: The company owns a portfolio of over 500 brands of alcoholic and non alcoholic beverages, spanning premium, mainstream, and craft categories.
Focus on Innovation: It invests significant money in R&D to develop new products, flavors, and packaging.
Focus on operational efficiencies: The company has focused heavily on optimizing the cost of productions. They have been implementing programs to increase production and reduce cost with supply chain management.

Financial Analysis AB InBev’s financials are complex, and have been affected by various factors in the past years.

Revenue and Earnings: The company has a high brand awareness, which is very strong with the ability to generate strong revenue growth, with 50% of total revenue from their top brands. Despite the growth in overall sales, operating margins have remained lower than before because of many external factors.
Cash Flow: The company generated over $13 billion in 2022. Even though free cash flow has been trending downward, management is focused on improving cash flows by reducing operating expenditure and optimizing the supply chain.
Debt Burden: Although the company has been improving its margins and generating huge revenues, the debt remains a major concern that could cause problems going forward. The debt from the SAB Miller acquisition and new acquisitions has put pressure on the finances.

Recent Concerns/Controversies/Problems The company faces a number of challenges:

Global supply chain disruptions: The ongoing supply chain disruptions have created increased input costs and lower sales volumes.
Inflation: High inflation is cutting into profitability as customers are more price-sensitive.
Geopolitical risks: The conflict between Russia and Ukraine has increased the cost of energy and affected international operations and profits.
Changing consumer preferences: Consumers are showing preference toward other alternatives like non-alcoholic options, craft beer and spirit based beverages.
Debt burden: Heavy debt load due to acquisitions are still weighing the company’s financial performance.
China’s beer market: The company has recently experienced some losses from China’s beer market, which has affected the company’s volume sales.

Management recognizes that it needs to reduce costs and increase prices, and it also believes that long-term structural trends in their market such as premiumization will benefit the company.

Moat Rating: 3 / 5

AB InBev has a narrow moat. The company has several factors working for them to have moats in their business, such as:

Brand Strength: AB InBev owns several strong beer brands with global recognition, which has allowed them to charge premium pricing. However, this only applies to their premium brands, and consumers may easily switch to cheaper alternatives.
Economies of Scale: The company has a massive brewing and distribution infrastructure, allowing it to achieve lower costs per unit. However, the cost advantage they derive from this has been fading as other companies adopt newer technologies and create their own infrastructure.
Distribution Network: Large distribution network is a huge moat that benefits from scale, but there is fierce competition in distribution industry as smaller players are also scaling up their facilities, and there is increased competition from e-commerce companies.
Proprietary technology: With new technologies being developed and being used at a massive scale, technology advantages have been becoming increasingly obsolete and easily repliable by the competitors.

These moats, however, are susceptible to change, and because AB InBev faces intense competition from all sides, I give it a 3/5 moat rating. This rating means that the company may be able to maintain its competitive advantages for several years. But in the future the moat can become weaker as the competitive dynamics are changing with new innovative entrants.

Risks to the Moat

Technological Disruption: New technologies in brewing and distribution can reduce AB InBev’s efficiency.
Shifting Consumer Preferences: A change in consumer tastes away from established brands could hurt sales and erode brand equity.
Economic Slowdown: Recessionary periods can lead to decreased consumer spending and increased brand switching, potentially harming even the established players.
Over-Leveraging: The company’s high debt burden could lead to financial distress and hurt investments.

Business Resilience AB InBev is a large company with diversified operations, which means they have more chances to recover from a downside. The company’s established brands and wide geographic presence allows for good resilience, and also their large size allows them to have a large financial capital to overcome such risks.

Understandability Rating: 2 / 5

While the core business model is relatively simple—making and selling beer and other beverages, the intricate financial structure, high leverage, complex ownership structure and supply chains, and large amounts of one-off transactions make this a complex company for an investor to study. Additionally, the company’s performance is heavily affected by macro-economic and geopolitical factors, which makes it even harder for an investor to foresee the direction in which the company may be headed.

Balance Sheet Health: 2 / 5

AB InBev’s balance sheet has always been something to be concerned about for its high leverage. Here’s why:

High Debt Levels: The company has high levels of debt which has been taken to fund acquisitions and expand the operations. This high debt load is particularly problematic in case of a bad economy or higher interest rates. A significant portion of this debt is fixed-rate loans at high interest.
Goodwill: A major portion of company’s total assets are goodwill, which is of debatable quality. If the acquired company performs badly, goodwill has to be written down, which in turn reduces assets and equity and hurts financial ratios.
Debt Servicing Challenges: Due to high debt, large portion of income goes in paying interest expenses, which limits the ability to return capital to shareholders or reinvest more aggressively.

The company is in a recovery mode, and is focused on deleveraging and generating more free cash flows by cutting operational expenses. But that will take some time, due to which I give the balance sheet a rating of 2/5.