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Morgan Stanley backs AB InBev as top pick in drinks sector

24 July 2023 By Ron Emler

Despite the continuing controversy over Bud Light’s link to transgender activist Dylan Mulvaney, analysts at investment bank Morgan Stanley have upgraded their forecasts for parent company AB InBev, ranking it their top pick in the beverage alcohol sector.

Morgan Stanley calculates that Belgium-based brewer AB InBev could see its shares rise by about 17% over the next few months.

More broadly, the nine analysts offering 12-month price forecasts for AB InBev have a median target of €66.00, with a high estimate of €76.00 and a low estimate of €60.00 compared with last week’s closing price of €52.70.

AB InBev’s shares have fallen by almost 8% this year while those of arch US rivals Molson Coors and Constellation Brands are both 41% ahead as they benefited from the Mulvaney/Bud Light fallout.

MarketWatch reported that May was the single worst month in AB InBev’s history, correlating to the single largest selloff of AB InBev stock.

But the consensus view is that for AB InBev’s shares the only way is up. Why? Because the decline in US sales is negligible in the context of global volumes and profitability.

CEO Michel Doukeris says that Bud Light losing its status as America’s most popular beer to Constellation’s Modelo Especial accounts for little more than 1% of AB InBev’s global sales and that there will be no lasting effect on the company.

It is the world’s largest beer brewer by both volume and revenue, operating more than 600 beer brands in 150 countries.

On that basis Doukeris has seen no reason to alter his full-year earnings forecast, especially as AB InBev’s share of the US market in dollar terms rose to 40.4% in the first four months of 2023, up from 38.3% at the same time last year.

Overall AB InBev is predicted to grow its earnings and revenues by 8.2% and 5.1% this year.

Size advantage

Part of its size advantage has since been eroded by the boycott. Yet despite a general consumer switch away from beer in the US, Statista forecasts that revenues in the US market will grow annually by 4.77% by 2027.

With a 40% market share AB InBev will be a main beneficiary from that growth, notably at the premium end of the price spectrum.

Overall, AB InBev is predicted to grow earnings and revenues by 8.2% and 5.1% with a return on equity of 10% in three years time.

And there is an irony in Constellation’s Modelo brand taking top spot in US sales because AB InBev owns it for the rest of the world.

So every extra sale of America’s favourite beer outside the US, based on Constellation’s successful development of the brand, boosts AB InBev’s own revenues.

That is a result of US anti-trust intervention in 2012 when AB InBev bought Grupo Modelo, Mexico’s biggest brewer, for US$20.1 billion but was forced to relinquish the US rights to the brand (and Corona Extra) to secure approval for the deal.

Taking over the Mexican-brewed brands has transformed Constellation. Since winning the US rights its shares have soared by almost 750% and are up by more than 18% so far this year.

Part of that growth is down to restructuring its wines and spirits divisions to place them in the more profitable premium priced segments of their markets, but the big driver has been the Mexican beers.

In its most recent full-year results Constellation’s beer unit generated almost 80% of the company’s total sales, growing revenues 11% to US$7.5 billion on shipments up 7% to 389 million (2.25-gallon) cases. Operating income advanced 6% to US$2.9 billion.

The shares put on 3% in the past week alone when the company announced a pact with activist investment group Elliott and a restructuring of the board.

The very fact that an activist investment group has agreed to work with the board has prompted Wall Street to be bullish with almost all brokers telling their clients to buy.

Some forecasts suggest the shares could hit almost US$400 in 2025 if they advance at the same rate as they have over the past decade. At that rate they would top US$1,000 by 2030.

To maintain that rate would be sensational, especially as the world is facing more sluggish progress than in the years before Covid-19 hit

There are also clouds in the Constellation sky, not least its US$4 billion investment in Canadian cannabis company Canopy Growth.

The attempt to gain pole position should the US federal government legalise cannabis and its drinks derivatives nationwide has proved a millstone, at least so far, with more than US$1 billion of the stake being written down.

Earlier this month Canopy agreed with lenders’ measures to reduce its debts by more than US$333 million after having flagged that there were doubts about its continuing as a going concern.

Analysts will note any comments about the Canopy stake accompanying Constellation’s next results, and which moves may be afoot following the pact with Elliott.