BUD stock not worth it as debt engulfs brewer’s cash flow

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Anheuser-Busch InBev (NYSE:BUD) the stock has had a difficult time. BUD’s stock has fallen by more than 40% in the past year, although it has actually increased by more than 63% in the past six months. But it will be some time before AB InBev can repair the damage that the novel coronavirus pandemic has caused to its businesses around the world.

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I suspect that it will take at least a year and probably more for AB InBev to overcome this higher leverage. Indeed, he is waiting for the end of the pandemic, the lifting of restrictions and the dissemination of a vaccine in the world.

Only then will the growth in alcohol sales in restaurants, retail outlets and related places begin to pick up.

However, the market is already feeling that light at the end of the tunnel, so to speak. This is why the stock of BUD has started to recover. But it will be some time before his financial health begins to underpin that optimism.

Debt and cash flow problem

For example, in the last six months to June 30, the company had to significantly increase its debt. Gross debt rose from $ 97.5 billion, including its short-term finance debt , to over $ 107.7 billion, or 10%.

This indebtedness also strained the company’s cash flow. For example, AB InBev reported that its operating cash flow in the first six months of this year was $ 4.39 billion.

However, after interest charges of $ 2.2 billion, tax payments of $ 1.4 billion, and some credits, its free cash flow was only $ 1.12 billion. This is a significant drop from last year when cash flow was $ 4.9 billion.

But here is the problem. The company’s capital expenditures cost an additional $ 1.58 billion. So, in effect, his free cash flow was negative – an outflow of $ 380 million.

Therefore, for all intents and purposes, the business just stands up with its higher debt load. Plus, he has until 2024 to drastically reduce this, as that’s when major debt repayments are due to begin.

What analysts say

A survey of 25 analysts by In search of the alpha has an average forecast of $ 45.25 billion in revenue for 2020. However, their average estimate for 2021 shows an increase of 8.9% to $ 49.3 billion. If that $ 4 billion in revenue translates into free cash flow, the business has a chance to eventually get out of debt problems.

In search of the alpha also shows that analysts’ earnings forecasts climb 58%, from $ 1.99 per share to $ 3.15 in 2021. The same is true with the Yahoo finance AB InBev analyst survey. Their estimates rise 60.6%, from $ 2.01 per share in 2020 to $ 3.23 in 2021.

In other words, hope is eternal here. But let’s think about this a bit. AB InBev now has a ton of debt after taking on an additional $ 10 billion in the past six months. At the rate of earnings growth and expected FCFs that these analysts’ earnings imply, it will take at least two years to reduce debt by just $ 10 billion. This leaves the company where it was before the coronavirus hit.

Therefore, the company is likely to have to continue selling assets. Over the past six months, AB InBev has sold its Australian breweries just to raise $ 10 billion. Such sales, while reducing cash flow, are likely to continue in order for the company to reduce its massive $ 110 billion debt.

What’s next with BUD Stock?

Right now, the BUD stock is trading 29 times this year’s expected earnings. However, considering the 60% rise in profits next year, its P / E multiple is only 18 times next year’s profits. And that’s after the stock has risen over 63% in the past six months.

Analysts should continue to see an improvement in the company’s financial results through 2022. I suspect the BUD stock will continue to rise as that happens.

However, until AB InBev’s debt starts to drop, I suspect the stock will stay in a hold pattern.

As of the publication date, Mark R. Hake does not have (directly or indirectly) any position in any of the stocks mentioned in this article.

Mark Hake directs the Total Value of Return Guide that you can consult here.

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