JPMorgan Downgrades Budweiser Parent Company Ahead Of 'Challenging' 2020

Anheuser Busch Inbev NV BUD faces a "challenging" environment in 2020, which will likely result in pressure on gross margin and EBITDA margin, according to JPMorgan.

The Analyst

Celine Pannuti downgraded Ab InBev's stock from Neutral to Underweight with a price target lowered from $79 to $65.

The Thesis

Budweiser's parent company is at a "turning point" as it looks to generate volume growth at a time when it is no longer willing to increase prices in line with inflation, Pannuti wrote in the note. The company is also facing a combination of new or intensifying competition in many of its most profitable markets, most notably Latin America.

Meanwhile, management's prior synergies initiatives are coming to an end and the company needs to invest more capital into its premium products. Anheuser Busch is unlikely to pursue M&A deals to help in the premium categories as there are "limited" acquisition targets in the market.

The company is also up against difficult Street estimates in 2020, including margin growth of 60 basis points while the research firm is modeling a 20 basis drop. Also, the research firm's 2020 and 2021 EPS estimate is 7% below the Street's current estimate which is likely to be re-rated lower ahead of what could be a multi-year trajectory of EPS downside.

Bottom line, the stock's valuation at 18 times 2020 estimated P/E and 11.8 times EV/EBITDA is at risk and investors "remain too optimistic" on the company's medium-term growth outlook.

Price Action

Shares of Ab InBev were trading at $73.32 at time of publication.

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