AB-InBev Shares Rise as Citi Upgrades to ‘Buy’ on Positive Earnings Outlook

Shares of AB-InBev saw a rise following an upgrade from Citi, which changed its rating on the stock from “neutral” to “buy.” This upgrade signals increased optimism regarding the company’s earnings potential and upcoming catalysts ahead of its third-quarter results, which are set to be announced on October 31.

At 4:17 am (0817 GMT), AB-InBev’s stock was up 2.5%, trading at €60.88.

Citi’s decision to upgrade the stock is backed by effective cost management, improving profit margins, and the belief that AB-InBev will surpass its full-year organic EBITDA growth guidance for 2024, which is set between 4% and 8%.

The analysts at Citi remain confident that AB-InBev can navigate challenges in the U.S. and Mexico despite ongoing difficulties in these markets. While third-quarter volumes are projected to be below market expectations due to weak demand, the company’s strong cost-cutting measures—particularly in the U.S.—are anticipated to enhance profit margins.

This situation has fostered greater confidence in the company’s earnings growth for both fiscal years 2024 and 2025, with margins expected to continue expanding into 2025. The company is also strategically adjusting its U.S. operations in response to a permanent decline in Bud Light sales, which is a crucial aspect of this analysis.

The U.S. market has been a point of concern due to ongoing issues stemming from the Bud Light controversy, which has notably affected sales. Citi predicts a 3.0% drop in sales to retailers in the U.S. during the third quarter, alongside a 2.3% decline in sales to wholesalers.

Despite these volume challenges, AB-InBev has benefited from pricing strategies implemented earlier in the year, which, along with a 5% decrease in the cost of goods sold per hectoliter, have improved overall financial health. The elimination of additional wholesaler support measures that previously constrained margins is also leading to a more positive financial outlook, with U.S. EBITDA margins expected to increase by 250 basis points in the third quarter.

Internationally, Brazil stands out as a strong market for AB-InBev, with estimates of 1.5% growth in beer volumes for the third quarter. July saw an increase in production, and solid performance is forecasted to continue. The company’s pricing actions earlier in the year are resulting in a 4% growth in revenue per hectoliter, while a lower rate of growth in costs is expected to further enhance margins; South American EBITDA margins are projected to rise by 140 basis points.

However, not all regions are likely to show similar performance. In the Middle Americas, volume growth is expected to remain flat or slightly negative due to poor weather conditions in Mexico and a consumer environment still grappling with economic pressures. In China, macroeconomic challenges and low consumer confidence are projected to result in a 6% drop in organic volumes. Nevertheless, AB-InBev’s pricing strategy and cost control measures are expected to mitigate the overall impact on its margins in these regions.

Citi’s outlook for AB-InBev encompasses more than just immediate performance, indicating a positive view for the company’s medium-term potential. Analysts are gaining confidence that the company can revert to pre-pandemic EBITDA margins of around 40%, compared to the 34% level recorded in fiscal year 2023, as commodity prices stabilize and pricing power strengthens.

Furthermore, by the end of 2024, AB-InBev’s net debt-to-EBITDA ratio is anticipated to dip below 3x, potentially creating space for shareholder returns, including a forecasted $1 billion share buyback, which could be announced with the third-quarter results. This anticipated buyback may lend technical support to the stock price, enhancing investor sentiment.

Citi has raised its target price for AB-InBev to €69 from €61, reflecting the improved earnings outlook and a reduced weighted average cost of capital of 6.9%, down from 7.1%. This target price is established using a discounted cash flow model that takes into account a risk-free rate of 3.4% and an equity risk premium of 5%. The lowering of WACC and the accelerating confidence in AB-InBev’s margin trends have countered minor downward revisions to earnings per share for fiscal years 2024 and 2025, primarily due to foreign exchange fluctuations.