EUR 850.00 For Business Accounts Only

Morningstar | Heineken Is Managed for the Long Term and Is a Solid Investment at the Right Price

When Anheuser-Busch InBev, already the largest global brewer, acquired the second largest player SABMiller in October 2016, it irreversibly beat Heineken to the industry cost leadership position. In the more than two years that followed, Heineken has competed well against its larger adversary, leading the industry in innovation and making strong moves into craft beer. Heineken's strategies for premiumisation, expanding adjacent categories, product innovation, and vertical integration make it a solid investment opportunity at the appropriate margin of safety, in our view.The international premium Heineken brand is strong and well positioned to exploit the long-term trend of premiumisation in alcoholic beverages, the source of our positive moat trend. The company has leveraged its brand equity to create at-home serving solutions, and with new product introductions such as extra-cold and non-alcoholic extensions of the Heineken brand, while the acquisition of Lagunitas is an important addition to Heineken's existing premium portfolio. In Brazil, Heineken's acquisition of Kirin's assets gives it a foothold in a large and profitable market that should boost long-term price/mix and margins.While AB InBev is run with a laser focus on cost control, Heineken is managed with long-term growth in mind. For investors this is a double-edged sword, likely to weigh on Heineken's financial metrics in the short term, with profitability and returns on capital structurally lower than those of AB InBev. However, the strategy should build a stronger business in the long-term. For example, in the United Kingdom, Heineken is pursuing a vertically integrated route to market and acquired 1,900 pubs. While we think this strategy gives Heineken a competitive advantage since it is now able to trial new products, it is a business with inherently lower returns on invested capital than brewing and is likely to weigh on regional ROIC. Over time, we see room for improvement in Heineken’s margin profile and expect it to improve to a high-teen EBIT margin by 2022.