The Anheuser Busch ADR (NYSE:BUD) stock lost its half value during the last 2 years. The last downward wave was due to the fact that the company announced it was going to cut the dividend in half in order to focus capital allocation on debt repayment. The move made the stock to look attractively undervalued so captured our attention.
BUD data by YCharts
Despite the public worries about the stock, the biggest players in the market-the institutional investors are increasing their share in company ownership. This is a great sign that the company has a great underlying value, which isn't noticeable at first sight. In the last 12 consecutive quarters, the net institutional money flow into the company's stocks was positive (Q4 2018 numbers hasn't been summed up yet).
Source: MarketBeat
So, we will try to discover the underlying value. Third quarter financial statement indicated 4.5% revenue growth, where 0.3% increase was contributed by volume increase and the 4.2% gain was due to higher prices. The price increase can't be a long-term sustainable growth opportunity for the company, as the beer industry has a high price elasticity, due to the high level of competition. Meanwhile, it worth mentioning that the company showed its ability to protect its business in an inflationary environment.
Economic Moat
The company enjoys great economic moat due to the vast global scale and near-monopoly position in some countries, which give the company great pricing power and margin expansion opportunities. Another great point in the company's moat is its cost advantage. Due to economies of scale, the company is able to minimize the COGS. In 2017 the company sold 612 million hectolitres of beverages, while Heineken (OTC:HEINY) sold only 218 million hectolitres of beverages. At the same time, the company is quite concentrated in local markets, which allows it to generate considerable cost economies from its size. In Brazil (which is the 3rd largest bear market in the world ) the firm has a dominant market share of 70% and in the USA the firm controls around half of the market. It helps the company to minimize fixed costs compared to its total sales.
Business Strategy
The firm has been very acquisitive, and now it owns five of the world's largest beer brands by volume, either directly or through equity ownership in the brand operator. The management has stated that it hopes to achieve cost savings from the SABMiller (LON:SAB) acquisition. The estimated cost savings of $3.2 billion would totally materialize as soon as in 2020. It is estimated that around $2.7 billion has already been captured and the rest $500 million will be realized in the upcoming year. That would contribute the company's strong margin expansion strategy helping them to keep its 32% operating margin.
Source: AbInBev 3Q report
Valuation
Looking at some historical valuation metrics we notice that the company is relatively undervalued. EV/Sales ratio is a very solid and reliable ratio to assess the company's valuation, as revenue fluctuates the least compared to other metrics. We see that the EV/Sales ratio is rather low from its 3-year median. In the chart below we notice that the EV/Salas ratio generally traded higher than its 3-year median in the last 10 years, but from the beginning of 2018, it plunged and now trades 22% lower than the median. 
BUD EV to Revenues (TTM) data by YCharts
At the same time, the EV/EBIT (TTM) crossed its 3-year median line in the recent month after a 4 year period when the ratio traded above the line.
BUD EV to EBIT (TTM) data by YCharts
Meanwhile, the P/E ratio is 17.8 compared to industry average 31.2 and BUD 5-year average 41.1, which indicates another sign of undervaluation.
DCF
DCF Valuation method is very subjective and we can't rely on it in 100%, but here I have tried to adopt a controversial approach to evaluate the stock, looking last 10-year record of revenue we see 4.5% CAGR, which we will adopt for the upcoming 10-year period, we will keep 32% operating margin which is quite controversial if we account the great economic moat the company has. The result will yield the same 4.5% EBIT growth which is quite modest compared to analysts' projected 7.1% growth rate.
Source: Yahoo (NASDAQ:AABA) Finance
Having 9.36% WACC and 2.727% indefinite growth rate, which is 10-year T-Note yield, we will have $91 price for a stock. Compared it with today's $70 stock price we see here a 30% growth opportunity for the stock.Analyst Estimates
At the same time, the stock is considerably undervalued compared to analyst's price estimates. Current price seats nera lowest target $69, and it is far away from average $88 price target, which promises another 26% stock appreciation opportunity.
Source: Yahoo Finance
Takeaway
The company has a leading position in its industry with a tremendous economic moat and a nice growth strategy. The stock price is rather undervalued, and we expect that $91 stock price is quite realistic.