Beer market is not healthy and likely to deteriorate
Consumers drinking less alcohol, younger demographic drinking less, beer is losing share to other alcoholic beverages, etc.
Global beer volumes used to grow lsd-msd but have been flat over the last 5 years
Pricing power appears to be eroding, in particular in the US
Two of the largest brewers believe beer has priced itself too aggressively in recent years and it’s getting to the point of being unable to take further price without accelerating volume declines
Some US distributors also believe beer is priced too high vs wine and spirits and we may see flat to down pricing going forwards
Cannabis will be incremental pressure
Public alcohol companies are quick to point out that there is no conclusive data showing how it’s detrimental. However every private player and distributor we spoke with believes it will have a negative impact
Cannabis is a psychoactive property with fewer calories and without some of the negative physical effects of alcohol
Can replace after work-relaxation beer, replace some alcohol in social settings, etc.
Cannabis legalization in of itself doesn’t appear to drive meaningful new demand overnight but over time legalization pressures cannabis pricing and cannabis beverages are beginning to come out which should drive substitution at a higher rate
In the US by the time the big brewers are legally able to participate we expect state operators will have already saturated the market
ABI is poorly positioned
81% of ABI’s volumes are mainstream or discount beer which are the worst performing segments as consumers trade up to premium beverages
Craft beer appears to have hit a ceiling in the US at 13% of volume but globally it only has 3% penetration and continues to take share
Business may be overoptimized
Heineken has a 17% EBIT margin vs ABI at 32%
Heard stories of sharing hotel rooms, shutting down elevators to conserve power, etc.
Research suggests management highly focused on hitting short-term #’s and their subordinates may be cutting into the bone to try and hit their #’s
Good chance of KHC type reinvestment needed
Beer experts we spoke with do not believe the margin structure is sustainable over the long run, we heard similar pushback from packaged food experts about KHC prior to their margin reset
Research suggested top 2000 employees are paid below market cash comp but provided stock related incentives which have historically been very valuable as the stock compounded
With the stock no longer compounding ABI may need to materially increase cash compensation
Operating trends are worse than headlines suggest
ABI highlights their headline organic growth however that is not value creating organic growth because it is driven by a pass-through of EM inflation vs mix shift, pricing, or volumes
We estimate price/mix in 2018 will be less than country weighted CPI
Underlying margins appear to be declining
SAB Miller synergies are in the final innings, excluding synergies it appears underlying EBITDA is organically declining
Valuation
Beer volumes have been weak for the last 5 years but ABI has benefited from synergies and input deflation
Now with synergies running out, and the balance sheet too levered to do large deals, the next few years do not look promising as cost-cutters try to pivot a potentially over-optimized business to organic growth
Going forwards if volumes are flattish, pricing is slightly below inflation, and they are out of cost cuts then EBIT does not grow in real terms
ABI is trading at 17.5x 2019 earnings with nearly 5x of debt
Risks
Manage to pull more levers
FX
Beer market improves
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