AB-InBev Moves as Citi Upgrades to ‘Buy’ on Strong Earnings Outlook By Investing.com

Investing.com — Shares of AB-InBev rose after Citi upgraded the stock to “buy” from “neutral,” reflecting increased confidence in the company’s earnings outlook and potential catalysts ahead of its upcoming third-quarter results to be released on October 31.

At 4:17 am (0817 GMT), AB-InBev was trading 2.5 percent higher at €60.88.

Citi’s move to upgrade the stock was driven by a combination of strong cost control, improving margins and the expectation that AB-InBev will exceed full-year 2024 organic EBITDA growth guidance of 4% to 8%.

Citi analysts remain confident in AB-InBev to overcome challenges in the US and Mexico, despite current headwinds in those markets.

While third-quarter volumes are expected to be below consensus estimates due to weak demand in these key markets, the company’s rigorous cost-cutting initiatives, particularly in the US, will boost margins.

This has led to greater confidence in AB-InBev’s revenue deliverability for both FY24 and FY25, with margins projected to continue expanding through 2025. The company is strategically adjusting its US operations in light of persistently reduced Bud Light volumes , a factor in this perspective. .

The US market was a particular focus due to the lingering softness in the Bud Light controversy, which had a notable impact on sales. Citi expects sales to US retailers to fall 3.0% in the third quarter, reflecting continued low momentum for Bud Light, while sales to retailers are expected to decline 2.3%.

Despite these volume challenges, AB-InBev is benefiting from pricing measures taken at the start of the year, along with a 5% drop in cost of goods sold per hectolitre.

The absence of additional support measures for wholesalers, which has been a drag on margins, is also helping to improve the financial outlook, with US EBITDA margins forecast to expand by 250 basis points in the third quarter.

In international markets, Brazil remains a strong point for AB-InBev, with Citi forecasting beer volumes in the country to grow 1.5% for the third quarter. Production in July accelerated, and the robust performance is expected to continue through the quarter.

In addition, the company is benefiting from the pricing measures taken at the beginning of the year, helping to increase revenue per hectoliter by 4%. COGS growth is expected to be lower, further supporting margin expansion in the region, with South American EBITDA margins projected to increase by 140 basis points.

However, not all regions are expected to perform equally well. In Central America, volumes are likely to be flat or slightly negative, held back by factors such as unfavorable weather in Mexico and a consumer environment that is still feeling the effects of economic pressure.

In China, macroeconomic challenges and weak consumer confidence will weigh on volumes, with Citi forecasting a 6% decline in organic volumes for the region. However, even in these regions, the company is benefiting from its pricing strategy and cost controls, helping to mitigate the impact on overall margins.

Citi’s outlook for AB-InBev extends beyond short-term performance, with a positive view of the company’s medium-term potential. There is growing confidence that the company can return to pre-pandemic EBITDA margins of around 40%, compared to the 34% level seen in FY23, as commodity prices stabilize and pricing power improves on its markets.

Analysts also signal that by the end of 2024, AB-InBev’s net debt/EBITDA ratio is expected to fall below 3x, creating room for shareholder returns, including a potential $1 billion share buyback that will be announced with the results of the third quarter. This potential buyback could provide technical support for the stock, further boosting investor sentiment.

Citi’s increased price target of €69 from €61 reflects the improved earnings outlook alongside a lower weighted average cost of capital of 6.9%, down from 7.1%. This target is based on a discounted cash flow model that incorporates a risk-free rate of 3.4% and an equity risk premium of 5%.

Lower WACC and higher confidence in AB-InBev’s margin trajectory offset minor downward EPS revisions in FY24 and FY25, primarily driven by foreign exchange factors.