AB-InBev Shares Rise After Citi Upgrade

Shares of AB-InBev increased after Citi upgraded the stock to “buy” from “neutral”, indicating greater confidence in its earnings outlook and upcoming catalysts ahead of Q3 results, set for October 31.

As of 4:17 AM (0817 GMT), AB-InBev traded 2.5% higher at €60.88.

Citi’s upgrade stems from strong cost control, improving margins, and the expectation that AB-InBev will surpass its 2024 organic EBITDA growth guidance of 4% to 8%.

Citi analysts express confidence that the company will navigate challenges in the U.S. and Mexico despite current market headwinds.

While third-quarter volumes may fall short of consensus estimates due to weak demand, AB-InBev’s aggressive cost-cutting strategies, especially in the U.S., are anticipated to enhance margins.

This has led to increased confidence in AB-InBev’s earnings prospects for both FY24 and FY25, with margins projected to expand further into 2025. The company is strategically adjusting U.S. operations in response to permanently reduced Bud Light volumes.

In the U.S., lingering issues from the Bud Light controversy continue to impact sales. Citi projects a 3.0% decline in sales to retailers for Q3 and a 2.3% drop in sales to wholesalers.

Despite these volume challenges, pricing actions from earlier in the year and a 5% decline in cost of goods sold per hectoliter bolster financials. The absence of additional wholesaler support measures has also improved the margin outlook, with U.S. EBITDA margins expected to expand by 250 basis points in Q3.

Internationally, Brazil remains a strong market for AB-InBev, with a 1.5% volume growth forecast for Q3. July production accelerated, and strong performance is expected to continue.

The company benefits from previous pricing actions, which contribute to 4% revenue-per-hectoliter growth. COGS growth is anticipated to be lower, supporting margin expansion in the region, with South American EBITDA margins projected to increase by 140 basis points.

Not all regions will perform well; the Middle Americas expect flat or slightly negative volumes due to adverse weather in Mexico and ongoing economic pressures. In China, weak consumer confidence could lead to a 6% decline in organic volumes.

However, even in challenging regions, AB-InBev benefits from its pricing strategy and effective cost controls, cushioning impacts on overall margins.

Citi’s outlook emphasizes AB-InBev’s medium-term potential to return to pre-pandemic EBITDA margins of ~40% from 34% in FY23, as commodity prices stabilize and pricing power improves.

Analysts expect AB-InBev’s net debt/EBITDA ratio to drop below 3x by the end of 2024, paving the way for shareholder returns, including a potential $1 billion share buyback announced with Q3 results. Such a move could offer technical support for the stock and enhance investor sentiment.

Citi increased its target price for AB-InBev to €69, up from €61, reflecting the positive earnings outlook along with a decreased weighted average cost of capital of 6.9%, down from 7.1%. This revised price is grounded in a discounted cash flow model with a risk-free rate of 3.4% and an equity risk premium of 5%. The lower WACC and enhanced confidence in AB-InBev’s margin trajectory have countered slight downward adjustments to FY24 and FY25 earnings per share due to foreign exchange factors.