Market Cap (EUR Mil) 29,751
52-Week High (EUR) 58.48
52-Week Low (EUR) 44.13
52-Week Total Return % -6.6
YTD Total Return % 5.2
Last Fiscal Year End 31 Dec 2012
5-Yr Forward Revenue CAGR % 5.1
5-Yr Forward EPS CAGR % 6.4
Price/Fair Value 1.03
2011 2012
2013(E) 2014(E)Price/Earnings 13.2 17.2 17.6 16.6
EV/EBITDA 7.5 9.6 9.1 8.6
EV/EBIT 10.7 13.9 13.1 12.0
Free Cash Flow Yield % 10.3 5.3 6.0 6.6
Dividend Yield % 2.8 2.1 1.7 1.8
2011 2012
2013(E) 2014(E)Revenue 17,123 18,383 19,597 20,425
Revenue YoY % 6.1 7.4 6.6 4.2
EBIT 2,697 2,912 3,028 3,303
EBIT YoY % 2.8 8.0 4.0 9.1
Net Income, Adjusted 1,583 1,693 1,692 1,792
Net Income YoY % 8.9 7.0 -0.1 5.9
Diluted EPS 2.70 2.94 2.93 3.11
Diluted EPS YoY % 4.7 8.9 -0.3 5.9
Free Cash Flow 1,271 -3,041 1,993 2,113
Free Cash Flow YoY % -41.0 -339.3 -165.5 6.0
Heineken’s Pricing Power Supports Our Narrow Moat Rating, but Challenges Remain; Stock Unattractive
See Page 2 for the full Analyst Note from 12 Feb 2014
R.J. Hottovy, CFA Director
rj.hottovy@morningstar.com +1 (312) 244-7060
Research as of 12 Feb 2014 Estimates as of 28 Oct 2013 Pricing data through 22 Apr 2014 Rating updated as of 22 Apr 2014
Investment Thesis 21 Aug 2013
The strength of Heineken's namesake brand and the ability to generate economies of scale and double-digit returns on invested capital give the company a narrow economic moat, in our opinion.
However, in most markets, Heineken must compete with Anheuser-Busch InBev, whose superior scale gives it a cost advantage. In recent years, Heineken has embarked on several ambitious actions in order to gain additional scale. In 2008, the company acquired Scottish & Newcastle's operations in the United Kingdom, Ireland, Finland, Portugal, Belgium, the United States, and India, increasing its capacity 24%. In 2010, Heineken acquired FEMSA Cerveza for EUR 5.25 billion, adding an additional 40 million hectoliters of annual production. And at the end of 2012, Heineken acquired the remaining shares of Asia Pacific Breweries that it didn't already own.
With 2012 volume of 221 million hectoliters, Heineken is Europe's largest brewer and the world's third-largest beer maker. The acquisition of FEMSA's beer operations made it markedly larger than nearest competitor Carlsberg, with around 119 million hectoliters. Following the FEMSA acquisition, Heineken's Americas segment accounts for almost 26% of the company's total operating profit, versus just 13% in 2009. As part of the acquisition, Heineken strengthened its portfolio of brands with the addition of the Dos Equis, Tecate, and Sol beer brands and improved its route to market in Mexico and Brazil for its iconic Heineken brand.
While Heineken derives 42% of its revenue from Western Europe and 18% from Central and Eastern Europe, these segments tend to be lower-margin than the rest of the company's operations. In much of Europe, the beer market is more fragmented than it is in the Americas and Africa.
We expect that in the coming decade, Heineken will continue to invest in growth in Africa and Asia, where the international premium segment for beer is expected to grow 7%-8%. In the past several years, Heineken has planted the seeds for growth via small acquisitions in Nigeria, Ethiopia, Egypt, and Haiti.
Additionally, the company is undertaking TCM 2, which aims to
Heineken is Western Europe's largest beer maker and the world's third-largest brewer. It has the leading position in many European markets, including the United Kingdom, the Netherlands, Austria, Greece, and Italy.
Its flagship brand, Heineken, is the world's leading international premium beer. While Europe accounted for 60% of the company's 2012 revenue, it delivered just 45% the firm's operating profits.
Profile Vital Statistics
Valuation Summary and Forecasts
Financial Summary and Forecasts
The primary analyst covering this company does not own its stock.
Currency amounts expressed with "$" are in U.S. dollars (USD) unless otherwise denoted.
Historical/forecast data sources are Morningstar Estimates and may reflect adjustments.
(EUR Mil)
Contents
Investment Thesis Morningstar Analysis
Analyst Note
Valuation, Growth and Profitability Scenario Analysis
Economic Moat Moat Trend Bulls Say/Bears Say Credit Analysis
Financial Health Capital Structure Enterprise Risk Management & Ownership Analyst Note Archive Additional Information Morningstar Analyst Forecasts Comparable Company Analysis Methodology for Valuing Companies
Fiscal Year:
Fiscal Year:
1
2 2 2 2 3 4
5 5 5 6 - - 7 11 13
Morningstar Analysis
Heineken’s Pricing Power Supports Our Narrow Moat Rating, but Challenges Remain; Stock Unattractive 12 Feb 2014
Heineken's full-year 2013 results narrowly missed our forecasts for revenue and operating income because of continued weakness in Western Europe. Nevertheless, group revenue per hectolitre increased 2.7% year over year, and it is this pricing power in a challenging operating environment because of the strength of its intangible assets, together with its cost advantage over smaller brewers, that gives Heineken a narrow economic moat. We think the firm's 2013 results lend support to our narrow moat rating, and we are comfortable with our cash flow forecasts. We do not intend to change our fair value estimate at this time.
Organically, group revenue was essentially flat, with a volume decline of 2.7% exactly offsetting the price increases implemented during the year. The only surprise to us came in Western Europe, which posted a 5.1% decline in organic revenue. Although management stated that trading conditions improved in Western Europe in the second half of the year, fourth-quarter organic revenue in the region declined by 8.5%, suggesting that conditions remain difficult. Nevertheless, Heineken will cycle a large excise tax increase in France in the first half of 2014, and we remain comfortable with our consolidated revenue growth estimate of 4.2% in fiscal 2014.
Heineken's profitability during the year was a little more concerning. Operating expenses increased by around 3%, despite the fall in volumes, and Heineken's reported EBIT margin was 13.3%, below its historical average.
To maintain its midteen operating margins and high-single- digit returns on invested capital, Heineken must stabilize volumes, push through price increases that cover cost inflation, or take further measures to reduce costs. Our 2014 estimates assume some operating margin expansion, and given the potential for improvement in Western Europe and
the ongoing cost-savings program, we remain comfortable with this assumption. However, with key markets failing to achieve significant growth and the stock trading close to our fair value estimate, we recommend investors wait for a more attractive entry point before investing in Heineken.
Valuation, Growth and Profitability 28 Oct 2013 We are maintaining our EUR 50 fair value estimate for Heineken's shares. We expect Heineken to deliver adjusted earnings per share of EUR 2.93 during 2013 and forecast EBIT to organically grow at 5%-6% per year over the next decade. Our valuation implies a forward P/E ratio of about 16 times.
Scenario Analysis
Volume growth in developing markets combined with the growth rate of Heineken's high-margin premium brands are the key drivers to our valuation. In our upside scenario, the company grows more rapidly in emerging markets and an economic slowdown in Europe is avoided; consequently, Heineken's revenue could grow 200 basis points per year faster than in our base-case scenario, and EBIT grows 8%-9% per year over the next decade. Should such a scenario occur, we would expect Heineken shares to be worth EUR 67.
In our downside scenario, Heineken's fair value is just EUR 39. This scenario could occur if Europe enters a prolonged recession, emerging-market growth falls short of our expectations, and competition erodes margins. In this scenario, Heineken's sales only climb by 1%-2% per year, and the company's earnings per share only expand by 3%-4% per year.
Economic Moat
Heineken has a narrow economic moat, in our opinion.
Volume is critically important in the beer industry because
brewing is a capital-intensive process that requires heavy
investment in plant and equipment, which means that
brewers operate with a high degree of operating leverage.
Heineken's volume of more than 200 million hectoliters lies at a midpoint between most microbrewers, which have no economic moats, and wide-moat firm Anheuser-Bush InBev, with almost 400 million hectoliters. Consequently, the company's financial performance reflects its middle-of-the-road position in the industry. We expect Heineken to average double-digit returns on invested capital throughout our forecast period.
Moat Trend
Heineken's moat trend is stable. The firm operates in an
industry where pricing is quite rational and market shares
are relatively stable. Given the importance of scale in
brewing, we think that the world's largest brewers will
maintain their competitive advantages over small-scale
breweries. Heineken has some well-known brands and has
invested considerably in marketing. Provided that the
company continues to invest in its brands, we think its moat
will remain stable in the medium term.
Bulls Say/Bears Say
Bulls Say Bears Say
3 Heineken is the third-largest brewer in the world by volume and the largest brewer in Europe. It has number-one positions in some key markets such as the U.K. and the Netherlands.
3 By acquiring FEMSA Cerveza, Heineken now controls 43% of the Mexican beer market and 10% of the Brazilian beer market and can now expand the distribution of its premium Heineken branded beer in these markets.
3 Heineken is the second-best-selling import beer brand in the U.S. and among the top 10 beer brands in the world.
3 Heineken's biggest market, Western Europe, is in decline.
3 The declining beer market in Europe is especially pronounced in the U.K., as the recession has fueled pub closures, furthering the drop-offs in consumption.
3 Heineken is not as profitable as its larger competitors.
Its underlying operating margins trail those of AB
InBev and SABMiller.
2013(E) 2014(E) 2015(E) 2016(E) 2017(E)
Cash and Equivalents (beginning of period) 1,037 409 816 862 929
Adjusted Available Cash Flow 1,741 1,841 1,967 1,898 1,991
Total Cash Available before Debt Service 2,778 2,251 2,784 2,759 2,921
Principal Payments -1,366 -1,816 -1,146 -999 -1,092
Interest Payments -645 -559 -559 -546 -546
Other Cash Obligations and Commitments — — — — —
Total Cash Obligations and Commitments -2,011 -2,375 -1,705 -1,545 -1,638
EUR Millions
% of Commitments
Beginning Cash Balance 1,037 11.2
Sum of 5-Year Adjusted Free Cash Flow 9,439 101.8
Sum of Cash and 5-Year Cash Generation 10,476 113.0
Revolver Availability — —
Asset Adjusted Borrowings (Repayment) — —
Sum of Cash, 5-Year Cash Generation, Revolver and Adjustments 10,476 113.0
Sum of 5-Year Cash Commitments -9,274 —
HEIA Sector Universe
Business Risk 4 4.2 5.1
Cash Flow Cushion 7 6.6 6.1
Solvency Score 6 4.8 4.8
Distance to Default 4 3.0 4.0
Credit Rating A- A- BBB+
Five Year Adjusted Cash Flow Forecast (EUR Mil)
Credit Analysis
Cumulative Annual Cash Flow Cushion
Cash Flow Cushion Possible Liquidity Need
Adjusted Cash Flow Summary
Credit Rating Pillars Peer Group Comparison
Source: Morningstar Estimates
Note: Scoring is on a scale 1-10, 1 being Best, 10 being Worst
Financial Health & Capital Structure
Heineken has leveraged up its balance sheet to acquire the remaining shares of Asia Pacific Breweries. Following the acquisition, Heineken's net debt/EBITDA ended 2012 at 2.8 times. We expect the company will devote much of its cash flow during the next two years to return its leverage to around 2.5 times by year-end 2014. Fortunately for equity investors, Heineken is able to raise long-term debt at relatively modest interest rates, and we do not believe its dividend payments will be in jeopardy.
While Heineken leveraged its balance sheet in 2008 to acquire assets from Scottish & Newcastle, it chose to issue equity in order to acquire FEMSA Cerveza. As of the end of 2012, Heineken had 576 million diluted shares outstanding, EUR 13.5 billion of debt, and EUR 1 billion of cash.
Enterprise Risk
Alcoholic beverages are subject to heavy taxation and
regulation, both of which can change rapidly in emerging
markets. With around two thirds of volume sold outside of
the eurozone, an appreciation in the euro could lead to a
material decline in revenue and earnings. Following the
acquisition of Asia Pacific Breweries, Heineken faces
integration risk and also could overpay on future
acquisitions.Heineken is also at risk of seeing volume
declines from a persistent economic downturn in Europe or
from persistently cool/damp summer seasons. Since beer
is highly seasonal, warmer weather typically bolsters
beverage consumption and cool temperatures can
temporarily impair the brewer's volumes.
Name Position Shares Held Report Date* InsiderActivity
NA NA NA NA NA
Top Owners % of Shares
Held % of Fund Assets Change
(k) Portfolio Date
Harbor International Fund 1.86 1.47 — 31 Dec 2013
MFS® International Value Fund 0.78 1.82 168 28 Feb 2014
Invesco Diversified Dividend Fund 0.58 2.52 436 31 Dec 2013
Oppenheimer International Growth Fund 0.41 1.01 — 28 Feb 2014
SKAGEN Kon-Tiki 0.40 1.94 -24 31 Mar 2014
Concentrated Holders
SF (Lux) SICAV 2 Skandia Mat Prot 2016 0.01 5.35 — 31 May 2013
Turgot Multicaps Europe — 5.10 — 31 Mar 2014
DB Platinum Agriculture Euro 0.01 5.04 17 31 Mar 2014
Berenberg European Equity Selection 0.01 4.79 -2 31 Dec 2013
SF (Lux) SICAV 2 Skandia Mat Prot 2022 0.06 4.77 26 30 Nov 2013
Top 5 Buyers % of Shares
Held % of Fund Assets
Shares Bought/
Sold (k) Portfolio Date Government Pension Fund of Norway - Global 0.84 0.04 1,539 31 Dec 2011
MFS Investment Management Ltd 0.51 2.24 1,434 30 Nov 2013
Lazard Frères Gestion 0.09 1.90 510 31 Dec 2013
Invesco Advisers, Inc. 0.61 2.52 440 31 Dec 2013
Baring Focused International Equity Fund 0.04 1.64 256 31 Dec 2010
Top 5 Sellers
OFI Global Asset Management 0.43 0.92 -2,935 28 Feb 2014
Schroder Investment Mngt N.A. Ltd. 0.11 0.19 -498 31 Dec 2013
Massachusetts Financial Services Co 2.07 1.46 -191 31 Mar 2014
Legal and General 0.30 0.17 -172 31 Jan 2014
KBC Asset Management NV — 0.07 -130 28 Feb 2014
Management 13 Feb 2013
Management & Ownership
Management Activity
Fund Ownership
Institutional Transactions
*Represents the date on which the owner’s name, position, and common shares held were reported by the holder or issuer.
While we think Heineken's stewardship of shareholder capital is standard, we note that the company has a complex governance structure and may not always protect the interests of minority investors. The company is 50% owned by Heineken Holding, which is 51% owned by L'Arche Green, which is predominantly owned by the Heineken family.
Heineken Holding's sole purpose is to manage Heineken.
Additionally, in conjunction with the FEMSA Cerveza acquisition, FEMSA owns a 20% economic stake in Heineken and is represented with two board members.
While we believe Heineken's 2008 acquisition of Scottish
& Newcastle was slightly expensive at 12 times enterprise
value/EBITDA, we believe the firm paid a fair 10 times
EV/EBITDA for FEMSA's beer operations. In order to acquire
FEMSA, Heineken assumed EUR 1.5 billion of debt and
issued EUR 3.8 billion worth of shares.
Growth (% YoY)
3-Year
Hist. CAGR 2010 2011 2012
2013 20145-Year Proj. CAGR
Revenue 7.7 9.7 6.1 7.4 6.6 4.2 5.1
EBIT 11.6 25.2 2.8 8.0 4.0 9.1 6.5
EBITDA 10.0 17.7 3.3 9.4 2.8 6.3 4.6
Net Income 17.1 38.0 8.9 7.0 -0.1 5.9 4.9
Diluted EPS 11.0 20.0 4.7 8.9 -0.3 5.9 6.4
Earnings Before Interest, after Tax 3.7 11.5 24.7 -19.9 45.6 10.4 14.2
Free Cash Flow -225.6 40.4 -41.0 -339.3 -165.5 6.0 —
Profitability
3-Year
Hist. Avg 2010 2011 2012
2013 20145-Year Proj. Avg
Operating Margin % 16.0 16.3 15.8 15.8 15.5 16.2 16.3
EBITDA Margin % 22.9 23.2 22.6 23.0 22.2 22.6 22.3
Net Margin % 9.2 9.0 9.2 9.2 8.6 8.8 8.9
Free Cash Flow Margin % 1.4 13.4 7.4 -16.5 10.2 10.4 10.3
ROIC % 7.7 7.8 9.7 5.8 8.7 9.4 9.9
Adjusted ROIC % 23.7 20.9 25.6 24.5 40.5 40.8 42.4
Return on Assets % 7.0 6.2 5.3 9.4 3.7 4.7 4.9
Return on Equity % 20.3 18.9 14.5 27.5 11.0 12.9 13.2
Leverage
3-Year
Hist. Avg 2010 2011 2012
2013 20145-Year Proj. Avg
Debt/Capital 0.50 0.48 0.49 0.54 0.49 0.45 0.44
Total Debt/EBITDA 2.68 2.43 2.43 3.19 2.72 2.38 2.27
EBITDA/Interest Expense 7.28 6.34 7.82 7.67 6.74 8.27 8.50
2011 2012
2013(E) 2014(E)Price/Fair Value 0.89 1.15 — —
Price/Earnings 13.2 17.2 17.6 16.6
EV/EBITDA 7.5 9.6 9.1 8.6
EV/EBIT 10.7 13.9 13.1 12.0
Free Cash Flow Yield % 10.3 5.3 6.0 6.6
Dividend Yield % 2.8 2.1 1.7 1.8
Cost of Equity % 10.0
Pre-Tax Cost of Debt % 4.0
Weighted Average Cost of Capital % 7.9
Long-Run Tax Rate % 28.0
Stage II EBI Growth Rate % 4.0
Stage II Investment Rate % 26.7
Perpetuity Year 20
EUR Mil Firm Value (%) Per Share
Value
Present Value Stage I 16,447 41.8 28.51
Present Value Stage II 9,134 23.2 15.83
Present Value Stage III 13,733 34.9 23.80
Total Firm Value 39,314 100.0 68.14
Cash and Equivalents 1,048 — 1.82
Debt -13,491 — -23.38
Preferred Stock — — —
Other Adjustments — — —
Equity Value 26,871 — 46.57
Projected Diluted Shares 577
Fair Value per Share —
Morningstar Analyst Forecasts
Forecast Fiscal Year Ends in December
Financial Summary and Forecasts
Valuation Summary and Forecasts
Key Valuation Drivers
Discounted Cash Flow Valuation
Additional estimates and scenarios available for download at http://select.morningstar.com.
The data in the table above represent base-case forecasts in the company’s reporting currency as of the beginning of the current year. Our fair value estimate may differ from the equity value per share shown above due to our time value of money adjustment and in cases where probability-weighted scenario analysis is performed.
(EUR)
2010 2011 2012
2013 2014Revenue 16,133 17,123 18,383 19,597 20,425
Cost of Goods Sold 10,291 10,966 11,849 12,738 13,174
Gross Profit 5,842 6,157 6,534 6,859 7,251
Selling, General & Administrative Expenses 2,665 2,838 3,037 2,577 2,661
Other Operating Expense (Income) -239 -64 -1,510 -78 -82
Other Operating Expense (Income) -325 -482 779 — —
Depreciation & Amortization (if reported separately) 1,118 1,168 1,316 1,333 1,368
Operating Income (ex charges) 2,623 2,697 2,912 3,028 3,303
Restructuring & Other Cash Charges — — — — —
Impairment Charges (if reported separately) — — — — —
Other Non-Cash (Income)/Charges 325 482 -779 105 —
Operating Income (incl charges) 2,298 2,215 3,691 2,923 3,303
Interest Expense 590 494 551 645 559
Interest Income 81 64 281 50 50
Pre-Tax Income 1,789 1,785 3,421 2,328 2,794
Income Tax Expense 403 465 525 675 768
Other After-Tax Cash Gains (Losses) — — — — —
Other After-Tax Non-Cash Gains (Losses) 193 240 213 -100 -104
(Minority Interest) -132 -130 -160 -220 -229
(Preferred Dividends) — — — — —
Net Income 1,447 1,430 2,949 1,333 1,692
Weighted Average Diluted Shares Outstanding 563 586 576 577 577
Diluted Earnings Per Share 2.57 2.44 5.12 2.31 2.93
Adjusted Net Income 1,454 1,583 1,693 1,692 1,792
Diluted Earnings Per Share (Adjusted) 2.58 2.70 2.94 2.93 3.11
Dividends Per Common Share 0.86 0.99 1.05 0.88 0.93
EBITDA 3,416 3,383 5,007 4,239 4,619
Adjusted EBITDA 3,741 3,865 4,228 4,344 4,619
Morningstar Analyst Forecasts
Income Statement (EUR Mil)
Fiscal Year Ends in December Forecast
2010 2011 2012
2013 2014Cash and Equivalents 610 813 1,037 409 816
Investments 17 14 11 11 11
Accounts Receivable 2,273 2,260 2,537 2,705 2,819
Inventory 1,206 1,352 1,596 1,716 1,774
Deferred Tax Assets (Current) — — — — —
Other Short Term Assets 212 269 356 356 356
Current Assets 4,318 4,708 5,537 5,197 5,777
Net Property Plant, and Equipment 7,687 7,860 8,792 8,867 8,940
Goodwill 10,890 10,835 17,725 17,725 17,725
Other Intangibles — — — — —
Deferred Tax Assets (Long-Term) 542 474 564 564 564
Other Long-Term Operating Assets 1,552 1,486 1,411 1,411 1,411
Long-Term Non-Operating Assets 1,673 1,764 1,950 1,950 1,950
Total Assets 26,662 27,127 35,979 35,714 36,367
Accounts Payable 4,265 4,624 5,273 5,669 5,863
Short-Term Debt 994 1,188 2,054 1,200 1,000
Deferred Tax Liabilities (Current) 241 207 305 305 305
Other Short-Term Liabilities 123 140 168 168 168
Current Liabilities 5,623 6,159 7,800 7,342 7,336
Long-Term Debt 8,078 8,199 11,437 10,600 10,000
Deferred Tax Liabilities (Long-Term) 1,169 1,054 1,930 1,930 1,930
Other Long-Term Operating Liabilities 1,572 1,623 2,050 2,050 2,050
Long-Term Non-Operating Liabilities — — — 205 309
Total Liabilities 16,442 17,035 23,217 22,127 21,625
Preferred Stock — — — — —
Common Stock 3,623 3,623 3,623 3,623 3,623
Additional Paid-in Capital — — — — —
Retained Earnings (Deficit) 4,829 5,653 7,703 8,528 9,683
(Treasury Stock) — — — — —
Other Equity 1,480 498 365 365 365
Shareholder's Equity 9,932 9,774 11,691 12,516 13,671
Minority Interest 288 318 1,071 1,071 1,071
Total Equity 10,220 10,092 12,762 13,587 14,742
Morningstar Analyst Forecasts
Balance Sheet (EUR Mil)
Fiscal Year Ends in December Forecast
2010 2011 2012
2013 2014Net Income 1,579 1,560 3,109 1,553 1,921
Depreciation 1,118 1,168 1,316 1,316 1,316
Amortization — — — — —
Stock-Based Compensation — — — — —
Impairment of Goodwill — — — — —
Impairment of Other Intangibles — — — — —
Deferred Taxes -40 -61 -74 — —
Other Non-Cash Adjustments -454 -7 -1,757 205 104
(Increase) Decrease in Accounts Receivable 515 -21 -64 -168 -114
(Increase) Decrease in Inventory 95 -145 -52 -120 -59
Change in Other Short-Term Assets — — — — —
Increase (Decrease) in Accounts Payable -156 417 217 396 194
Change in Other Short-Term Liabilities — — — — —
Cash From Operations 2,657 2,911 2,695 3,182 3,363
(Capital Expenditures) -648 -800 -1,170 -1,391 -1,389
Net (Acquisitions), Asset Sales, and Disposals -116 -1,028 -4,635 — —
Net Sales (Purchases) of Investments 357 73 180 — —
Other Investing Cash Flows — — — — —
Cash From Investing -407 -1,755 -5,625 -1,391 -1,389
Common Stock Issuance (or Repurchase) -381 -687 — — —
Common Stock (Dividends) -483 -580 -604 -508 -538
Short-Term Debt Issuance (or Retirement) — — — -854 -200
Long-Term Debt Issuance (or Retirement) -1,207 195 3,909 -837 -600
Other Financing Cash Flows -101 38 -249 -220 -229
Cash From Financing -2,172 -1,034 3,056 -2,419 -1,567
Exchange Rates, Discontinued Ops, etc. (net) 36 6 114 — —
Net Change in Cash 114 128 240 -628 407
Morningstar Analyst Forecasts
Cash Flow (EUR Mil)
Fiscal Year Ends in December Forecast
Company/Ticker Price/Fair
Value 2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)Anheuser-Busch Inbev SA BUD USA 1.02 19.6 21.7 19.7 11.0 12.2 10.3 14.0 17.1 11.7 3.4 3.4 3.2 3.5 4.0 3.5
Carlsberg AS CARL B DNK 0.97 — 14.2 12.9 8.7 7.8 7.2 16.6 17.8 14.8 1.4 1.3 1.3 1.3 1.2 1.2
Diageo PLC DEO USA 0.97 16.7 16.8 17.7 13.8 14.6 13.1 — 40.3 18.8 — 7.4 6.5 — 4.6 4.0
SABMiller PLC SAB GBR 0.96 18.7 23.2 19.8 8.1 9.4 8.0 16.2 20.1 12.5 1.6 2.1 1.7 2.4 3.2 2.8
Molson Coors Brewing Co TAP USA 1.04 10.9 14.7 13.7 11.2 10.9 9.9 13.6 20.1 13.2 1.3 1.3 1.2 2.6 2.5 2.5
Average 16.5 18.1 16.8 10.6 11.0 9.7 15.1 23.1 14.2 1.9 3.1 2.8 2.5 3.1 2.8
Heineken NV HEIA NL 1.03 17.2 17.6 16.6 9.6 9.1 8.6 19.1 16.6 15.1 2.5 2.4 2.2 1.6 1.5 1.5
Company/Ticker Total Assets
(Mil) 2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)Anheuser-Busch Inbev SA BUD USA — USD 12.4 10.6 10.6 36.8 36.0 32.2 18.4 31.5 17.0 6.2 10.9 6.2 2.6 3.7 2.3
Carlsberg AS CARL B DNK 141,948 DKK 1.4 7.1 7.6 1.4 7.1 7.6 6.7 9.3 9.8 2.9 4.0 4.3 — 1.5 1.9
Diageo PLC DEO USA — GBP 15.2 13.4 16.6 15.2 13.4 16.9 — 39.4 35.8 10.3 10.5 10.1 2.3 2.2 3.0
SABMiller PLC SAB GBR — USD 6.8 8.5 10.2 12.6 15.4 13.1 17.9 12.7 13.8 8.9 5.9 6.7 3.3 2.7 3.8
Molson Coors Brewing Co TAP USA 16,212 USD 6.6 5.4 7.0 8.1 6.6 8.6 5.7 6.8 9.1 3.1 3.4 4.8 2.3 2.2 2.4
Average 8.5 9.0 10.4 14.8 15.7 15.7 12.2 19.9 17.1 6.3 6.9 6.4 2.6 2.5 2.7
Heineken NV HEIA NL 35,979 EUR 5.8 8.7 9.4 24.5 40.5 40.8 27.5 11.0 12.9 9.4 3.7 4.7 2.1 1.7 1.8
Company/Ticker Revenue
(Mil) 2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)Anheuser-Busch Inbev SA BUD USA 39,758 USD 1.8 8.6 17.4 1.3 11.3 20.7 10.7 9.8 12.9 -14.3 -141.1 -371.9 16.6 69.9 -34.2
Carlsberg AS CARL B DNK 67,201 DKK 5.7 0.1 4.0 1.0 3.7 9.1 4.1 5.0 9.9 -125.3 -2,928.1 19.4 -100.0 — 9.9
Diageo PLC DEO USA 10,762 GBP — 6.2 0.3 — 9.3 0.3 12.7 10.8 2.5 -79.1 151.9 144.2 6.4 8.3 23.7
SABMiller PLC SAB GBR 16,713 USD 10.4 4.5 0.0 12.0 9.9 4.3 12.2 11.1 3.8 -355.0 -154.1 -1.6 17.9 13.9 23.6
Molson Coors Brewing Co TAP USA 3,917 USD 11.4 8.0 2.9 4.8 3.2 12.1 3.7 1.3 7.4 -330.6 -146.2 43.6 4.4 2.3 7.4
Average 7.3 5.5 4.9 4.8 7.5 9.3 8.7 7.6 7.3 -180.9 -643.5 -33.3 -10.9 23.6 6.1
Heineken NV HEIA NL 18,383 EUR 7.4 6.6 4.2 8.0 4.0 9.1 8.9 -0.3 5.9 -339.3 -165.5 6.0 6.0 -16.1 5.9
Comparable Company Analysis
These companies are chosen by the analyst and the data are shown by nearest calendar year in descending market capitalization order.
Valuation Analysis
Returns Analysis
Growth Analysis
Price/Earnings EV/EBITDA Price/Free Cash Flow Price/Book Price/Sales
ROIC % Adjusted ROIC % Return on Equity % Return on Assets % Dividend Yield %
Revenue Growth % EBIT Growth % EPS Growth % Free Cash Flow Growth % Dividend/Share Growth %
Last Historical Year
Last Historical Year
Company/Ticker Net Income
(Mil) 2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)Anheuser-Busch Inbev SA BUD USA 7,276 USD 58.6 59.3 56.7 39.0 39.8 41.2 32.1 32.9 33.8 18.3 18.7 17.7 25.2 23.1 29.6
Carlsberg AS CARL B DNK 5,572 DKK 49.7 50.0 50.0 20.7 21.1 21.8 14.8 15.3 16.0 8.3 8.7 9.1 7.6 6.9 8.0
Diageo PLC DEO USA 2,350 GBP — 60.9 60.0 35.5 36.1 36.6 31.7 32.6 32.6 21.8 22.9 23.1 — 11.3 21.5
SABMiller PLC SAB GBR 3,437 USD 52.9 51.9 52.1 38.0 40.2 42.3 30.8 32.4 33.7 20.6 22.0 23.0 14.7 15.8 22.6
Molson Coors Brewing Co TAP USA 711 USD 39.9 42.3 42.4 31.2 30.5 32.5 24.2 23.2 25.2 18.1 17.1 17.8 19.4 12.6 18.7
Average 50.3 52.9 52.2 32.9 33.5 34.9 26.7 27.3 28.3 17.4 17.9 18.1 16.7 13.9 20.1
Heineken NV HEIA NL 1,693 EUR 35.5 35.0 35.5 23.0 22.2 22.6 15.8 15.5 16.2 9.2 8.6 8.8 8.3 9.1 9.7
Company/Ticker Total Debt
(Mil) 2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)Anheuser-Busch Inbev SA BUD USA 44,341 USD 107.8 97.5 88.9 51.9 49.4 47.1 6.1 5.6 8.0 2.9 2.9 2.4 3.0 2.8 2.7
Carlsberg AS CARL B DNK 39,831 DKK 66.9 62.2 60.8 40.1 38.3 37.8 5.2 5.9 5.9 2.9 2.8 2.6 2.4 2.3 2.3
Diageo PLC DEO USA 9,208 GBP 164.8 151.9 150.5 62.2 60.3 60.1 10.0 10.4 10.3 2.4 2.6 2.5 — 3.6 3.6
SABMiller PLC SAB GBR 19,226 USD 76.7 70.3 59.1 43.4 41.3 37.2 5.8 4.9 7.5 3.0 2.6 2.3 2.2 2.1 2.0
Molson Coors Brewing Co TAP USA 4,668 USD 58.6 51.9 44.3 37.0 34.2 30.7 6.6 6.1 6.8 3.8 3.3 2.8 2.0 2.0 1.9
Average 95.0 86.8 80.7 46.9 44.7 42.6 6.7 6.6 7.7 3.0 2.8 2.5 2.4 2.6 2.5
Heineken NV HEIA NL 13,491 EUR 115.4 94.3 80.5 53.6 48.5 44.6 7.7 6.7 8.3 3.2 2.7 2.4 3.1 2.9 2.7
Company/Ticker Market Cap
(Mil) 2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)Anheuser-Busch Inbev SA BUD USA 175,114 USD 4.33 5.96 8.07 1.01 0.73 0.75 0.89 0.61 0.64 1.31 1.25 1.66 50.1 43.4 45.0
Carlsberg AS CARL B DNK 82,909 DKK 37.68 56.87 59.06 0.79 0.90 0.92 0.63 0.74 0.75 1.71 2.60 2.65 — 25.5 25.0
Diageo PLC DEO USA 77,849 USD 0.43 0.71 0.53 1.52 1.55 1.47 0.69 0.79 0.70 0.80 0.89 0.66 47.8 45.3 54.5
SABMiller PLC SAB GBR 49,320 GBP 0.47 1.35 1.31 0.70 0.67 0.85 0.51 0.53 0.68 0.70 0.88 4.26 31.4 46.3 50.2
Molson Coors Brewing Co TAP USA 10,709 USD 3.43 3.04 3.93 0.67 0.96 1.19 0.59 0.84 1.06 0.50 1.38 3.58 52.4 42.9 33.0
Average 9.27 13.59 14.58 0.94 0.96 1.04 0.66 0.70 0.77 1.00 1.40 2.56 45.4 40.7 41.5
Heineken NV HEIA NL 29,751 EUR 1.80 0.71 1.41 0.71 0.71 0.79 0.51 0.47 0.55 0.50 0.34 0.82 20.5 38.1 31.8
Comparable Company Analysis
These companies are chosen by the analyst and the data are shown by nearest calendar year in descending market capitalization order.
Profitability Analysis
Leverage Analysis
Liquidity Analysis
Gross Margin % EBITDA Margin % Operating Margin % Net Margin % Free Cash Flow Margin %
Debt/Equity % Debt/Total Cap % EBITDA/Interest Exp. Total Debt/EBITDA Assets/Equity
Cash per Share Current Ratio Quick Ratio Cash/Short-Term Debt Payout Ratio %
Last Historical Year
Last Historical Year
3 Moat Valuation 3 Three-Stage Discounted Cash Flow 3 Weighted Average Cost of Capital 3 Fair Value Estimate 3 Scenario Analysis 3 Uncertainty Ratings 3 Margin of Safety 3 Consider Buying/Selling 3 Stewardship Rating
their fair value. A number of components drive this rating: (1) our assessment of the firm’s economic moat, (2) our estimate of the stock’s intrinsic value based on a discounted cash-flow model, (3) the margin of safety bands we apply to our Fair Value Estimate, and (4) the current stock price relative to our fair value estimate.
The concept of the Morningstar Economic Moat™ Rating plays a vital role not only in our qualitative assessment of a firm’s investment potential, but also in our valuation process.
We assign three moat ratings—none, narrow, or wide—as well as the Morningstar Moat Trend™ Rating—positive, stable, or negative—to each company we cover. There are two major requirements for firms to earn either a narrow or wide moat rating: (1) the prospect of earning above-average returns on capital; and (2) some competitive edge that pre- vents these returns from quickly eroding. The assumptions we make about a firm’s moat determine the length of “eco- nomic outperformance” that we assume in the latter stages
enterprise value and the value of the firm if no future net in- vestment were to occur. Said differently, moat value identi- fies the value generated by the firm as a result of any future net new investment. Our Moat Trend Rating reflects our as- sessment of whether each firm’s competitive advantage is either getting stronger or weaker, since we think of moats as dynamic, rather than static.
At the heart of our valuation system is a detailed projection of a company’s future cash flows. The first stage of our three- stage discounted cash flow model can last from 5 to 10 years and contains numerous detailed assumptions about various financial and operating items. The second stage of our mod- el—where a firm’s return on new invested capital (RONIC) and earnings growth rate implicitly fade until the perpetuity year—can last anywhere from 0 years (for no-moat firms) to 20 years (for wide-moat companies). In our third stage, we assume the firm’s RONIC equals its weighted average cost of capital, and we calculate a continuing value using a standard Morningstar Research Methodology for Valuing Companies
Analyst conducts company and industry research:
Financial statement analysis Channel checks Trade-show visits Industry and company reports and journals Conference calls Management and site visits 3 3
3 3
3 3
Strength of competitive advantage is rated:
None, Narrow, or Wide Advantages that confer an economic moat:
High Switching Costs (Microsoft)
Cost advantage (Wal-Mart) Intangible assets (Johnson & Johnson) Network Effect (Mastercard) Efficient Scale (Lockheed Martin)
Analyst considers past financial results and focuses on competitive position and future prospects to forecast future cash flows.
Assumptions are entered into Morningstar’s proprietary discounted cash-flow model.
The analyst then eval- uates the range of potential intrinsic values for the company and assigns an Uncertainty Rating: Low, Medium, High, Very High, or Extreme.
The Uncertainty Rating determines the margin of safety required before we would rec- ommend the stock.
The higher the uncer- tainty, the wider the margin of safety.
Analyst uses a discounted cash-flow model to develop a Fair Value Estimate, which serves as the foundation for the Morningstar Rating for stocks.
The current stock price relative to Morningstar’s Fair Value Estimate, adjusted for uncertainty, determines the Morningstar Rating for stocks.
The Morningstar Rating for stocks is updated each evening after the market closes.
QQQQQ QQQQ QQQ QQ Q
Fundamental Analysis
Economic Moat
TMRating
Company Valuation
Fair Value Estimate
Uncertainty
Assessment
3 Uncertainty Methodology 3 Cost of Equity Methodology 3 Morningstar DCF Valuation Model 3 Stewardship Rating Methodology
* Please contact a sales representative for more information.
Instead, we rely on a system that measures the estimated volatility of a firm’s underlying future free cash flows, tak- ing into account fundamental factors such as the diversity of revenue sources and the firm’s fixed cost structure.
We also employ a number of other tools to augment our valu- ation process, including scenario analysis, where we assess the likelihood and performance of a business under different economic and firm-specific conditions. Our analysts typically model three to five scenarios for each company we cover, stress-testing the model and examining the distribution of resulting fair values.
The Morningstar Uncertainty Rating captures the range of these potential fair values, based on an assessment of a company’s future sales range, the firm’s operating and fi- nancial leverage, and any other contingent events that may impact the business. Our analysts use this range to assign an appropriate margin of safety—or the discount/premium
prices receive our highest rating of five stars, whereas firms trading above our consider-selling prices receive our lowest rating of one star.
Morningstar Margin of Safety and Star Rating Bands
Price/Fair Value 2.75
2.50 2.25 2.00 1.75 1.50 1.25 1.00 0.75 0.50 0.25
Low Medium High Very High*
* Occasionally a stock’s uncertainty will be too high for us to estimate, in which case we label it Extreme.
• 5 Star
• 4 Star
• 3 Star
• 2 Star
• 1 Star
Uncertainty Rating
— 125%
105% — 80% —
— 95%
— 135%
110% —
70% —
— 90%
— 155%
115% —
60% —
— 85%
— 175%
125% —
50% —
— 80%
New Morningstar Margin of Safety and Star Rating Bands as of August 18th, 2011
Our corporate Stewardship Rating represents our assess- ment of management's stewardship of shareholder capital, with particular emphasis on capital allocation decisions.
Analysts consider companies' investment strategy and
valuation, financial leverage, dividend and share buyback
policies, execution, compensation, related party transac-
tions, and accounting practices. Corporate governance
practices are only considered if they've had a demonstrated
impact on shareholder value. Analysts assign one of three
ratings: "Exemplary," "Standard," and "Poor." Analysts judge
stewardship from an equity holder's perspective. Ratings
are determined on an absolute basis. Most companies will
receive a Standard rating, and this is the default rating in
the absence of evidence that managers have made
exceptionally strong or poor capital allocation decisions.
coverage list.
3 Encapsulates our in-depth modeling and quantitative work in one letter grade.
3 Allows investors to rank companies by each of the four underlying com- ponents of our credit ratings, including both analyst-driven and quantitative measures.
3 Provides access to all the underlying forecasts that go into the rating, available through our insti- tutional service.
different lenses—qualitative and quantitative, as well as fundamental and market-driven. We therefore evaluate each company in four broad categories.
Business Risk
Business Risk captures the fundamental uncertainty around a firm’s business operations and the cash flow generated by those operations. Key components of the Business Risk rating include the Morningstar Economic Moat
™Rating and the Morningstar Uncertainty Rating.
Cash Flow Cushion
™Morningstar’s proprietary Cash Flow Cushion
™ratio is a fundamental indicator of a firm’s future financial health The measure reveals how many times a company’s internal cash generation plus total excess liquid cash will cover its debt-like contractual commitments over the next five years. The Cash Flow Cushion acts as a predictor of financial distress, bringing to light potential refinancing, operational, and liquidity risks inherent to the firm.
3 3 3 3 3
3
The higher the rating, the less likely we think the company is to default on these obligations.
The Morningstar Corporate Credit Rating builds on the modeling expertise of our securities research team. For each company, we publish:
Five years of detailed pro-forma financial statements Annual estimates of free cash flow
Annual forecasts of return on invested capital
Scenario analyses, including upside and downside cases Forecasts of leverage, coverage, and liquidity ratios for five years
Estimates of off balance sheet liabilities
These forecasts are key inputs into the Morningstar Corporate Credit Rating and are available to subscribers at select.morningstar.com.
Morningstar Research Methodology for Determining Corporate Credit Ratings
Competitive Analysis
Cash-Flow Forecasts
Scenario Analysis
Quantitative Checks
Rating Committee
A AA
BBB
C
D
