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Morningstar | When It Rains, It Pours; Slightly Lowering FVE on Latest Headwind for ABI: Emerging-Markets FX

We are modestly lowering our fair value estimate for Anheuser-Busch InBev to $124 per ADR from $126, following the sharp depreciation of emerging-market currencies against the U.S. dollar in recent weeks. This is another headwind for the world's biggest brewer, already fighting volume declines in the U.S., its largest market; volatility in Brazil, its second-largest; and a more recent slowdown in South Africa. Furthermore, this will pose an additional challenge to the firm's primary medium-term use of capital: deleveraging the balance sheet following its acquisition of SAB Miller in 2016. Nevertheless, the company remains very well diversified geographically,  and while this new headwind is unwelcome, we think it is more than priced into the stock, which we regard as being significantly undervalued.

The U.S. dollar, AB InBev's reporting currency, has trended higher against most currencies since the beginning of the year, but has strengthened sharply against several emerging-market currencies over the last month. AB InBev has transactional exposure to the Brazilian real (which we estimate to represent around 16% of EBIT and has declined almost 27% over the average rate last year), the South African rand (6% of EBIT and down 14% over last year), the Argentine peso (4% of EBIT, down 123%), and the Turkish lira (1% of EBIT and down 78%). Accordingly, we have slightly lowered our revenue assumptions for 2018 and 2019, and because AB InBev is probably fully hedged against most of these currencies for this year, we expect most of the headwind to EBIT to occur in 2019. We have lowered our 2019 EPS estimate by $0.16, or 3%, but we still anticipate low-double-digit earnings growth due to decent organic sales growth of over 4%, some margin expansion from cost savings, and lower interest expense.

Sentiment was already low on AB InBev, and there is no doubt that the emerging-markets currency depreciation will have destroyed value if rates remain in line with current levels, but we think the additional 10% decline over the past month is an overreaction. Any reversal in emerging-market currencies may provide an upside catalyst, but given investors' concerns about the level of debt on the balance sheet, investors may have to be patient while waiting for the value to be unlocked from AB InBev's stock.