RBC Questions Anheuser Busch's Margins, Guidance, Debt In Downgrade

The theory behind the bullish case for beer company Anheuser Busch Inbev NV BUD remains valid, but the stock's momentum since December implies a positive rating can't be justified, according to RBC Capital Markets. 

The Analyst

Analyst James Edwardes Jones downgraded Anheuser-Busch's European-listed stock from Top Pick to Sector Perform with an unchanged €75 ($84.25) price target.

The Thesis

The bullish case for Budweiser's parent company is based on its superior margin profile versus rivals and its ability to "absorb meaningful adverse" currency fluctuations, Jones said in the Thursday downgrade note.

While both arguments remain true, three new concerns need to be addressed, the analyst said:

• Margin growth.
• 2019 guidance. 
• Debt concerns.

Despite Anheuser's "perceived awesomeness," the company's margins aren't as good as they appear, Jones said.

Over the past decade, AB InBev's EBIT margins expanded by 475 basis points — but  when excluding the many M&A deals that were highly accretive on the margin line, underlying organic margins would have fallen by 275 basis points, the analyst said. 

Subsidiary AmBev warned investors that it expects to see a mid-teens percentage increase in its Brazilian cost of sales per hectolitre, and AB InBev's management "has not been forthcoming" in its 2019 guidance, Jones said. 

AB Inbev's stock performance will "remain very dependent" on currency fluctuations given a notable mismatch between its U.S. and euro-denominated debt and operating cash flow, which includes "just about every" global currency, according to RBC. 

Price Action

Anheuser Busch's U.S.-listed shares were down 1.85 percent at $80.57 at the time of publication Thursday.

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