AB InBev's Business Just Keeps Getting Better and Better

Anheuser-Busch InBev's (NYSE: BUD) 2016 acquisition of SABMiller is looking like a better and better buy with each quarter.

The best proof of this is in AB InBev's widening EBITDA margin. The beer giant's earnings before interest, taxes, depreciation, and amortization are rising thanks to cost efficiencies and "premiumization" initiatives.

EBITDA is an excellent way for investors to get a read on how profitable a business is. This is because it excludes unrelated (but no-less-important) income-statement items. A company's EBITDA margin gets right to the nitty-gritty of how good a business is at making a profit off goods and services (in this case, beer). 

The new AB InBev serves up results

AB InBev bulls believe that the company's status as the world's biggest beer brewer will allow it to be profitable for decades to come.

They have a lot to support their view -- particularly AB InBev's rising EBITDA margin.

The beer conglomerate's expanding EBITDA margin is evidence that its cost-cutting initiatives (a pillar of its SAB Miller acquisition) are working. Coupled with top-line growth, it also bolsters the argument that the brewer owns incredibly valuable beer brands.

These successes couldn't come at a better time, as AB InBev is facing a few challenges.

The best-laid plans? 

Consumers are demanding craft beers instead of "megabeers" like Budweiser and Bud Light. If AB InBev can't adapt to this reality, it could be in trouble. After all, cost-cutting won't mean much for the bottom line if the top line is shrinking.

Image source: Statista.

As if a craft-brewer onslaught weren't bad enough, the company also has to contend with an enormous debt load:

Bud's parent company took on a lot of debt to buy SAB Miller. Increasing the combined company's profitability will be crucial to ensure its ability to pay down its enormous liabilities. And those who are less-than-enthusiastic on the megabrewer's shares rightly point out that these two fronts may prove too much, no matter how well-conceived its plans post-merger. 

AB InBev has a few tricks up its sleeve

To combat the rise of craft beer, and fully capitalize on its SAB Miller acquisition, AB InBev is employing two strategies.

First, it is acquiring craft-beer brands  -- which become more valuable as part of the megabrewer's vast distribution network. Second, it is putting its brands through a process of "premiumization." The goal is to increase the perceived authenticity, taste, experience, and price of a beer brand. There are lots of ways to make this happen. Limited-time-only labels on Budweiser bottles? That's premiumization. Basically, AB InBev is trying to make its top three brands (Budweiser, Corona, and Stella Artois) more like craft beer.

AB InBev's initiatives are proving extremely successful. Organic revenue growth (a key metric for a beer conglomerate that can grow by acquisition) was 5% in its third quarter. Revenue per hectoliter grew 3.2%, or 3.6% on a constant-currency basis. These top-line performances are due in large part to the company's premiumization initiatives, and serve as proof that the bulls have the stronger argument for now. Cost of goods sold fell by 1.9% in the third quarter, thanks to synergies following the merger. 

Image source: AB InBev.

The good times look set to continue. As part of its third-quarter report, management upped guidance on multiple key metrics. Total revenue growth is expected to accelerate, led by the premiumization of the company's major brands. Total synergies gained through the SAB Miller acquisition are expected to be $3.2 billion, up from a previously estimated $2.8 billion. 

And as for those sizable liabilities, all is going according to plan there as well. Total debt stood at $187 billion at the end of fiscal 2016. Just nine months later, AB InBev had managed to eliminate almost $8 billion of its debts -- not bad. 

Brewing up bigger profits

AB InBev is firing on all cylinders now that it has fully integrated with SAB Miller. Its expanding EBITDA margin is exhibit A. All the more impressive, the total expected synergies gained by merging the two beer giants have risen as well. As icing on the cake, the company is proving adept at altering the perception of its major brands. This alone is proving to be an enormously powerful lever that is already driving results.

With dominant market share in dozens of key markets, a widening profit margin, and a not-to-be-sneezed-at dividend yield of 3.45%, BUD shares are looking tasty heading into the new year. 

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Sean O'Reilly has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Anheuser-Busch InBev NV. The Motley Fool has a disclosure policy.

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