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Published: June 4, 2010
Stocks with scant analyst coverage often
offer opportunity for individual investors to exploit market
inefficiencies. The small-cap arena is usually the most fruitful
place to uncover these opportunities, but every now and then a
firm with a larger
market capitalization will fail to get the attention it
merits from Wall Street.
One firm has fallen out of coverage in the United States simply
because it was acquired by a rival across the pond in Europe. As
a result, only four analysts currently provide earnings
estimates. There is some international coverage, but in
aggregate, analysts keeping tabs on the company is woefully
inadequate given the firm has a market cap of $76 billion and is
one of the five largest consumer goods firms in the world.
The firm in question is Anheuser-Busch InBev (NYSE: BUD),
one of the largest brewers in the world. Belgium-based Inbev
acquired St. Louis-based Anheuser Busch, also known endearingly
as the "King of Beers", in the middle of 2008. The newly-formed
company established an American Depository Receipt on the New
York Stock Exchange last year to again reach out to U.S.
investors.
A-B InBev's global reach is simply astounding. The company sells
beer in 23 countries, boasts 152 beverage plants around the
globe, and holds a number one or two market position in 19
countries. The North American, Latin American and European
regions account for 91% of last year's $36.8 billion in sales.
Thanks to the
buyout of the "King of Beers," the mature North American
market drives more than half of AB-Inbev's profitability and
provides the firepower to sell Budweiser, Stella Artois, and 13
billion-dollar beer brands into faster-growing regions like
Brazil and parts of Central and Eastern Europe.
Despite exposure to appealing emerging markets, A-B InBev is not
a play on top-line growth. Sales will be lucky to grow a couple
of percent a year given the firm's total size -- not to mention
the fact that beer has been around for thousands of years. In
that time, local markets have had sufficient time to consolidate
to a handful of leading brands, with A-B InBev, SABMiller and
Heineken possessing a stranglehold on global
market share. Despite the slow growth, these firms still
have pricing power to demonstrate there is a competitive
advantage that goes with industry dominance.
Instead, an investment in A-B InBev is a play on continued
merger synergies and the reduction of a massive debt load
(currently $47 billion) that InBev needed to acquire
Anheuser-Busch. In terms of synergies, management expects to
wring out $2.25 billion in costs, which is close to double its
original estimates. This stems from traditional cost cutting as
well as
working capital improvements, such as more quickly
collecting payments from customers.
Debt elimination should boost
cash flow as interest expense
decreases and frees up capital to repurchase shares and boost a
lagging dividend, currently yielding 0.8%. .Last year,
free cash
flow was $7.7 billion, or nearly $5 a share -- impressive, even
with the high debt level.
A primary way to value a company is by discounting its future
cash flows back to calculate its
present value. At the current
share price, the market is discounting a very low cash flow
growth rate of only about +1% a year. This is unreasonably low
and means the stock is significantly undervalued because
analysts and investors aren't giving AB-InBev any credit for its
cost cutting plans and debt lowering that will improve its
bottom line.
Action to Take --> If A-B
Inbev can grow cash flow in the mid single digits, then the
shares are undervalued by at least -40% from current levels.
This includes a compelling downside cushion given consumers
drink beer regardless of the economic climate. Overall, it's a
good time to get in on AB-InBev, before analysts wake up to the
fact that it has a very compelling risk/reward tradeoff right
now.
-- Ryan Fuhrmann
Contributor
StreetAuthority |
