Market Cap (GBP Mil) 54,493
52-Week High (GBX) 3,460.00
52-Week Low (GBX) 2,650.20
52-Week Total Return % 6.7
YTD Total Return % 9.3
Last Fiscal Year End 31 Mar 2014
5-Yr Forward Revenue CAGR % 5.6
5-Yr Forward EPS CAGR % 39.2
Price/Fair Value 1.06
2013 2014
2015(E) 2016(E)Price/Earnings 28.3 80.8 23.3 23.4
EV/EBITDA 9.7 12.6 7.9 7.5
EV/EBIT 12.1 17.7 9.5 9.0
Free Cash Flow Yield % 4.1 3.3 8.1 8.9
Dividend Yield % 2.7 3.4 4.1 4.0
2013 2014
2015(E) 2016(E)Revenue 17,458 16,704 17,473 18,352
Revenue YoY % 4.5 -4.3 4.6 5.0
EBIT 5,486 3,151 6,512 6,874
EBIT YoY % -11.2 -42.6 106.7 5.6
Net Income, Adjusted 3,310 1,007 3,971 3,981
Net Income YoY % -21.8 -69.6 294.3 0.2
Diluted EPS 122.44 37.07 145.32 144.87
Diluted EPS YoY % -22.3 -69.7 292.0 -0.3
Free Cash Flow 3,702 375 3,851 4,294
Free Cash Flow YoY % -149.8 -89.9 926.3 11.5
SABMiller Disposal of Tsogo Sun Stake Likely to Be Moat- Enhancing
See Page 2 for the full Analyst Note from 07 Jul 2014
Philip Gorham, CFA, FRM Senior Equity Analyst philip.gorham@morningstar.com +31 (0) 20 560 2962
Adam Fleck, CFA Director
adam.fleck@morningstar.com +1 (312) 384-4820
Research as of 07 Jul 2014 Estimates as of 02 Jul 2014 Pricing data through 21 Jul 2014 Rating updated as of 21 Jul 2014
Investment Thesis 20 Jun 2014
Over the past few years, SABMiller has been one of the most compelling emerging markets stories in our consumer defensive coverage universe. It remains a strong business, with a wide moat based on its cost advantage in Africa and an impressive growth profile from its broad emerging markets presence (about 80% of EBIT, ex-associates). However, its margins lag those of local rival AmBev (majority-owned by global leader Anheuser-Busch InBev) in the key emerging markets of Latin America, and we think there are structural barriers to the margin gap being closed in the medium term.
The first issue preventing a closure of the margin differential is scale. Brazil (where AmBev has a 63% share) is the third largest market in the world by total volumes and is by far the largest beer market in Latin America, with total 2013 consumption of 134 million hectolitres. For context, the second-largest market was Colombia (where SABMiller operates a near-monopoly 98% market share) with 20 million hl, and Mexico consumed 7 million litres. This scale and concentration of market share gives AmBev a wide economic moat, in our opinion, a cost advantage that SABMiller is unlikely to replicate in its much smaller markets in the region.
The second issue is the affordability of beer. Our analysis shows that GDP per capita covers the wholesale price of a hectolitre of beer by 129 times in South America (ex-Brazil) and 115 times in Brazil. This is more than double the 50 times coverage ratio in SABMiller’s Latin American markets, partly as a result of lower price points in AmBev’s markets (the firm generates $85 per hl in revenue in South America ex-Brazil, versus the $126 per hl generated by SAB) and partly because GDP per capita is higher in its markets (about $11,000 versus $6,300 for SAB’s Latin American markets). Using forecasts of per capita GDP growth from the U.S.
Department of Agriculture's Economic Research Service to 2020, we estimate that at 3% regional GDP growth, it would take eight years of flat pricing for our affordability index in SAB’s Latin American segment to equal that of A-B InBev’s segment.
SABMiller is the second-largest brewer in the world and was created when South African Breweries bought Miller Brewing Company from Altria in 2002. The company controls roughly 14% of the global beer market, while operating such top brands as Snow, Miller, Peroni, Pilsner Urquell, and Grolsch. SABMiller has the number-one or number-two spot in more than 90% of the markets in which it competes. Altria holds a 27% stake in the firm.
Profile Vital Statistics
Valuation Summary and Forecasts
Financial Summary and Forecasts
The primary analyst covering this company does not own its stock.
Currency amounts expressed with "$" are in U.S. dollars (USD) unless otherwise denoted.
Historical/forecast data sources are Morningstar Estimates and may reflect adjustments.
(USD 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 3 3 4 5
6 6 6 8 9 - 12 16 18
Morningstar Analysis
SABMiller Disposal of Tsogo Sun Stake Likely to Be Moat-Enhancing 07 Jul 2014
On July 7, SABMiller announced that it will divest its almost 40% stake in South African hotel and casino operator Tsogo Sun Holdings. The sale should raise about $1 billion in cash.
We regard the move as value-neutral, as we do not believe it moves the needle on our fair value estimate, but we think the strategy of shedding this business to focus on core operations in Africa, the source of SABMiller's wide economic moat, will strengthen the firm's ability to generate excess returns on invested capital in the future.
The announcement that the equity holding in Tsogo will be sold does not come as a surprise, as the firm announced in April 2014 that it was considering strategic options for its investment. We are intrigued, however, by CEO Alan Clark's comments that proceeds from the sale would be reinvested in "(our) core growth business, including our African operations." We think this reallocation of capital to the core business in Africa could enhance the company's competitive advantage by growing scale and lowering average cost of production in a region in which it already possesses a strong cost advantage.
With an existing $2 billion in cash on its balance sheet, the sale of its investment in Tsogo will give a SABMiller significant war chest for growing the business. We expect SABMiller's top priority to be to defend its share against the encroachment of other multinational companies with an eye on Africa, such as Diageo and Heineken, so it could increase research and development and marketing expenditure. Second, with whitespace opportunities still available, bolt-on acquisitions could be a value-added use of the cash. For example, the firm is the number one brewer in Mozambique, Zambia, and Botswana, but has little presence in Zimbabwe, a nation encircled by those three countries. We believe that plugging gaps such as this could deliver medium-term increasing returns to scale in SABMiller's African business, thus fortifying the firm's wide
economic moat.
Valuation, Growth and Profitability 20 Jun 2014 After transferring coverage to a new analyst, we are retaining our GBX 3,200 fair value estimate on SABMiller.
Our valuation implies fiscal 2015 multiples of 22.6 times price/earnings, 15.1 times EV/EBITDA, and a free cash flow yield of 4.9%. These implied multiples are higher than the multiples implied by our valuations in the rest of the group, and we think this is justified given we believe SABMiller has one of the widest economic moats and strongest medium-term earnings growth trajectories in the industry.
We forecast 6% revenue growth over our five-year forecast period, fairly high for the industry and roughly in line with AmBev, its primary competitor in Latin America, but below the 10% average growth rate over the past five years in the region. Beer volumes in South America are highly correlated with GDP per capita, particularly in low income markets, and we believe that lower commodity inflation (led by lower demand from China) could lead to slightly lower volume and pricing inflation rates over the next few years. We expect revenue growth to be driven fairly evenly between volume and price/mix, with a slight bias to pricing, and with Latin America and Africa the key growth geographies.
Cost benefits from Foster's and fixed cost leverage should
drive near-term profitability improvements, and we expect
SABMiller to generate normalized EBIT margins in the
mid-30% range, in line with A-B InBev. About 90 basis points
of margin expansion should come at the gross margin, as
we believe even low-single-digit volume growth should
drive some efficiency gains and input cost inflation is
anemic. We estimate a further 60 basis points of margin
expansion could come through fixed cost leverage and
optimization of the Foster's business. Prior to its split,
Foster's was investing more heavily in its wine business
than the structurally declining beer business, and when
SABMiller ramps up investments and rolls out best practices in its acquired Australian operations, we think margins could improve.
We assume a stage 2 growth rate of 6% and a WACC of 8.3%, both in line with most peers, particularly closest competitor A-B InBev.
Scenario Analysis
Near-term cost rationalization and the medium-term per capita consumption trends in Latin America are the key variables in our scenario analysis. In our bull case, we assume an additional 50 basis points on the EBIT margin between fiscal 2016 and 2019, leading to a normalized EBIT margin of almost 36%. This is above our assumptions for A-B InBev, and given the industry leader's greater economies of scale, we believe this would be an unlikely outcome unless management squeezes out more costs than expected from the Foster's acquisition. We grow the top line by an average of 7% in our bull case, as volumes in SABMiller's Latin American markets grow faster than the 2% we anticipate, and per capita consumption reaches levels in line with AmBev's more mature South American
markets. Our bull case normalized EBIT margin is 40%, which we believe is aggressive and only achievable if the cost savings in Australia and its ongoing Business Capabilities Program flow through to the bottom line. Under these circumstances, we would value SABMiller at GBX 3,900, or 22% above our fair value estimate and 25 times our fiscal 2016 EPS estimate of almost $3 per share.
Conversely, our bear-case scenario assumes levels of volume growth in Latin America below that implied by GDP per capita forecasts, and that cost savings are reinvested in the business, providing no upside to profitability. In our bear case, we assume revenue grows at 3%, in line with global GDP and implying sluggish volume growth, with price/mix being the key driver. Whether or not BCP creates further cost savings, SABMiller is forced to reinvest the savings into the business, a scenario that could be realized if competition increases in some of its hitherto uncompetitive markets. We hold the EBIT margin fairly constant throughout our five-year forecast period, assuming that the 33% margin achieved in 2014 is a reasonable representation of normalized profitability. Given that we expect the global brewing industry to consolidate further, and that even low single digit volume growth should create some gross margin expansion, we think this is unlikely, but possible if A-B InBev makes aggressive organic moves into new markets. Under these circumstances, we would value SABMiller shares at GBX 2,300 per share, or 19 times our fiscal 2016 EPS estimate and 28% below our fair value estimate.
Economic Moat
We believe SABMiller has a wide economic moat derived
from a material cost advantage over most of its peers. In
fiscal 2013, the firm sold a total of 307 million hl of
beverages, second only to industry behemoth Anheuser-Busch
InBev (426 million hl) and well ahead of third-placed
Heineken (195 million hl). SABMiller benefits from
first-mover advantage in many parts of Africa, where it
possesses monopolistic control over the beer and soft drinks bottling markets in geographies such as Botswana, Mozambique, Swaziland, Zambia, and South Africa. It would be very difficult for a new entrant to replicate SABMiller’s manufacturing and distribution infrastructure and dislodge the company from its leadership position in these markets.
Although SABMiller generated just $18 in EBITDA per hectolitre in 2013, well below the $40 generated by A-B InBev, its presence in early-stage developing markets in Africa primarily explains this. SABMiller’s operating margins are comparable with those of A-B InBev in the low 30% range, and its operating costs of $43 per hl were the lowest of the four largest global brewers in 2013, including A-B InBev at $68.
Although SABMiller has some brand equity in its largest brands, we do not believe this is a major contributor to the firm’s economic moat. The firm owns Snow, the world’s largest beer brand by volume, which sold 89.2 million hl in China in 2013, according to The Drinks Business. We believe, however, that the firm’s intangible assets are less significant than that of A-B InBev, whose bigger presence in the premium category gives it more exposure to one of the most brand-loyal segments of beer drinkers.
At first glance, SABMiller’s historical returns on capital do not appear to support our wide moat rating. Including goodwill, ROIC has averaged 6.7% over the past nine years, and has exceeded our 8.3% estimate of the firm’s weighted average cost of capital only once, in 2007. However, the firm has achieved its scale and its number-two global position largely through acquisition, and when goodwill is excluded, SABMiller has generated consistent mid-teens ROICs. We believe that going forward, with the cost savings from the Foster’s acquisition fully realized, SABMiller can achieve double-digit ROIC on a consistent basis, and that ROICs could gradually improve as rising prices in Africa leverage
the firm’s fixed cost base.
Moat Trend
We believe that offsetting forces keep SABMiller’s moat trend stable. On the positive side, the firm’s manufacturing and distribution infrastructure in several early-stage developing markets is already established. Therefore, little in the way of capital investment for growth will be required going forward, and as economic development in those markets continues, returns on capital should expand. On the negative side, we expect SABMiller to come under greater pressure in developed markets. The core consumer base of the premium segment earns a lower level of income than that of the super-premium and craft categories, so demand for premium beer is more subject to cyclical macroeconomic forces, particularly unemployment, and consumers are more price-sensitive. Brand loyalty, therefore, tends to be lower in SABMiller’s core market segments. If other developed markets follow the lead of the U.S. in becoming more super-premium-focused and fragmented, SABMiller’s mainstream product portfolio could be one of the hardest hit by share losses.
Market share erosion alone would not make SABMiller’s
wide economic moat deteriorate, however. For returns on
capital to begin to materially decline, share and volume
declines in developed markets would have to accelerate to
a rate faster than both the price increases in those markets
and the volume growth in developing markets. We regard
this as a low probability scenario given the strong growth
drivers in emerging markets such as a swelling of the
age-appropriate population categories, growing disposable
incomes, and urbanization.
Bulls Say/Bears Say
Bulls Say Bears Say
3 SABMiller has immense scale, controlling about 10%
of the global beer market, according to Euromonitor, six of the world's top 50 brands, and the number-one or number-two spot in more than 90% of its markets.
3 SABMiller earns a majority of its operating profits from developing and emerging countries, and we think these regions have the potential to deliver strong and balanced volume and price/mix growth over the coming years.
3 SABMiller's presence in soft drinks as a bottler for The Coca-Cola Company (about 20% of group volumes) provides diversification from the beer market.
3 Just as SABMiller's dominant market shares have helped create its economic moat, A-B InBev's monopolistic control over its markets has so far closed the door to new market entry for competitors such as SABMiller.
3 Growth in emerging markets and volume declines in developed markets will create a negative mix effect for SABMiller that will take many years of pricing growth to erode.
3 SABMiller has been acquisitive in recent years. It is
possible that future transactions will not deliver
acceptable returns, and consequently could erode
shareholder value.
2015(E) 2016(E) 2017(E) 2018(E) 2019(E)
Cash and Equivalents (beginning of period) 2,081 2,968 1,878 2,516 1,617
Adjusted Available Cash Flow 2,654 2,717 2,936 2,800 3,125
Total Cash Available before Debt Service 4,735 5,685 4,814 5,316 4,742
Principal Payments -1,705 -3,434 -1,774 -2,000 -795
Interest Payments -1,086 -1,084 -955 -694 -554
Other Cash Obligations and Commitments -128 -128 -128 -128 -128
Total Cash Obligations and Commitments -2,919 -4,646 -2,857 -2,822 -1,477
USD Millions
% of Commitments
Beginning Cash Balance 2,081 14.1
Sum of 5-Year Adjusted Free Cash Flow 14,233 96.7
Sum of Cash and 5-Year Cash Generation 16,314 110.8
Revolver Availability 2,000 13.6
Asset Adjusted Borrowings (Repayment) — —
Sum of Cash, 5-Year Cash Generation, Revolver and Adjustments 18,314 124.4
Sum of 5-Year Cash Commitments -14,720 —
SAB Sector Universe
Business Risk 3 4.4 5.0
Cash Flow Cushion 7 6.6 6.0
Solvency Score 5 4.8 4.8
Distance to Default — 3.1 3.8
Credit Rating A A- BBB+
Five Year Adjusted Cash Flow Forecast (USD 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
SABMiller is in solid financial health. SABMiller ended fiscal 2013 with $15 billion of debt, net of cash, and a debt/EBITDA ratio of 2.5 turns. This is slightly higher than that of A-B InBev but below most of its brewing peers, and we think it gives SABMiller flexibility to increase gearing for acquisitions. The global brewing industry is still fairly fragmented (using Euromonitor market share data, we estimate a Herfindahl index of just 0.07, suggesting an unconcentrated industry) and we believe SABMiller will continue to play its part in consolidation. Nevertheless, net debt/EBITDA is currently close to the peak level of 2.5 times, at the time of the Foster's acquisition, and we expect a material portion of the company's $3.3 billion free cash flow run rate to be allocated to paying down debt. Absent acquisitions, we forecast debt/EBITDA to fall below a ratio of 1 times in 2018.
SABMiller faces $6 billion of maturing debt in both fiscal 2017 and fiscal 2019, but given the company's free cash flow generation in the low-20% range of revenue, we believe the firm will comfortably meet its repayment schedule during the next five years. We assign SABMiller an issuer credit rating of A, implying low default risk.
Enterprise Risk
SABMiller is second only to A-B InBev in its geographic footprint, and although that reduces geographic concentration risk, it also creates foreign exchange risk.
There is a high correlation between per capita GDP growth
and per capita beer consumption, particularly in Latin
America, one of A-B InBev's key markets, so the firm is highly
leveraged to global economic growth.SABMiller's largest
market in Latin America is Colombia, where FARC
paramilitaries have been engaged in a bloody conflict with
successive governments for half a century. If current
negations with the rebels fail, or the guerilla warfare
spreads, parts of the country (particularly in rural areas)
Credit Analysis
could remain out of reach of distribution for consumer
product firms, and this would probably hinder the economic
growth outlook of the country.About one third of revenue
and EBIT (ex-minority subsidiaries) is generated in Africa,
primarily South Africa. The turbulent geopolitical landscape
in this region could periodically create road bumps in
SABMiller's growth path.
Name Position Shares Held Report Date* InsiderActivity MR. ALAN CLARK Chief Executive Officer,Director 164,103 03 Jun 2014 —
MR. GEOFFREY BIBLE Director 89,250 24 Jun 2014 —
MR. JAMES WILSON Chief Financial Officer,Director 88,058 23 Jun 2014 — MR. MILES QUINTIN
MORLAND
Director 50,000 24 Jun 2014 —
MR. DINYAR S DEVITRE Director 30,000 24 Jun 2014 —
MR. JOHN ALEXANDER MANZONI
Director 7,797 25 Jun 2014 —
MR. PETER JOHN
MANSER CBE DL Chairman,Director 5,000 24 Jun 2014 —
Top Owners % of Shares
Held % of Fund Assets Change
(k) Portfolio Date
L&G Pension PMC UK Eq Inx Acc 1.15 1.42 -2,941 30 Nov 2013
VA CollegeAmerica EuroPacific Growth 0.58 0.46 -1,727 30 Jun 2014
Oppenheimer Developing Markets Fund 0.56 1.21 — 31 May 2014
Artisan International Fund 0.50 2.64 214 30 Jun 2014
VA CollegeAmerica New Perspective 0.43 0.74 260 30 Jun 2014
Concentrated Holders
Satrix Indi 0.03 18.10 — 18 Jul 2014
NewFunds NewSA ETF — 12.10 14 31 Mar 2014
STANLIB Top 40 ETF 0.01 10.60 0 30 Jun 2014
Momentum Top 40 Index — 10.49 -2 30 Jun 2014
Allan Gray Optimal 0.01 10.44 165 31 Mar 2014
Top 5 Buyers % of Shares
Held % of Fund Assets
Shares Bought/
Sold (k) Portfolio Date
Allan Gray Unit Trust Mgmt 0.95 4.89 15,126 31 Mar 2014
Government Pension Fund of Norway - Global 1.50 0.15 2,902 31 Dec 2011
Hansard Europe 0.14 0.30 2,258 31 May 2014
Nedgroup Collective Investments 0.12 2.35 1,889 30 Jun 2014
T. Rowe Price Associates, Inc. 0.30 1.08 1,516 31 Mar 2014
Top 5 Sellers
Legal and General 1.41 1.26 -3,248 31 Jan 2014
Thornburg Investment Management, Inc. 0.25 1.04 -2,359 31 May 2014
Capital Research and Management Company 1.42 0.44 -1,080 30 Jun 2014
Virtus Investment Advisors (VIA) 0.46 3.93 -970 31 Mar 2014
Manning & Napier Advisors, LLC 0.23 1.52 -948 30 Jun 2014
Management 20 Jun 2014
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.
We are raising our stewardship rating for SABMiller to Exemplary from Standard. The former CEO, the late Graham Mackay, was the architect of the transformation of the business from a small cap provincial brewer in South Africa in the 1980s to a global consolidator today. Illness forced him to step down in 2013, but we believe current CEO Alan Clark has been well groomed to run the business with little impact to strategy and culture, and we expect SABMiller to continue to play a part in industry consolidation going forward.
In our opinion, management has done a sound job of creating value through acquisitions, with arguably the only blot on its copybook being the 2011 acquisition of Foster's at 13 times EV/EBITDA. The deal was unpopular with some investors because it valued Foster's at some of the highest multiples ever paid in a mature market transaction in the beer industry, despite the secular low-single-digit decline of industry volumes in its core market. However, we estimate EBIT margins are slightly north of 40% in Australia, well above the low-30% margin of the consolidated group, and are likely to go higher as SABMiller implements best practices and cuts costs at Foster's. This incremental cash flow could help to achieve the long-term organic and transactional objectives of the firms in emerging markets.
We also believe SABMiller's MillerCoors JV in the U.S.
supports our Exemplary rating, as it helped to unlock substantial value, while the firm's partnership with Efes in Russia and Ukraine as well as its brewery expansions in Africa should also prove to be beneficial to shareholders.
After selling Miller to South African Breweries in 2002, U.S.
tobacco giant Altria owns about 27% of SABMiller and has
significant control over its board, and this is one of our only
concerns over the governance of SABMiller. Altria has a low
cost base in its SABMiller holding, so the tax implications
to Altria would play a pivotal role in any negotiations over
the sale of the company to an acquirer.
Analyst Notes
We Are Skeptical on a Potentially Disruptive AB InBev- SABMiller Merger 30 Jun 2014
In recent months, rumors have been widely reported that Anheuser-Busch InBev, the world's largest beer maker, is interested in acquiring SABMiller, the second largest.
Proponents of the deal point to cost synergies, the per capita consumption opportunity in SAB's markets, and the margin differential in Latin America between SABMiller (mid-20s EBIT margins) and Ambev (high 40s). While we largely agree on the cost synergies point and believe ABI's economic moat would be enhanced by a deal through a deeper cost advantage, we believe the relative lack of affordability of beer in SAB's Latin American markets will prevent consumption growth from reaching the level of Ambev's markets for several years. Further, with the market appearing to price in a takeout, we doubt that ABI could acquire SAB at a value-creating price.
If Anheuser-Busch InBev did buy SABMiller, it would acquire an attractive asset in Africa, in our opinion, a market in which the world's largest brewer has yet to build a meaningful presence. In its domestic market of South Africa, SABMiller's first-mover advantage allows it to manufacture and distribute at a lower-cost base than competitors, which in turn allows it to offer products at lower price points. In a market where around 75% of alcohol consumption is brewed at home, we believe this structural cost advantage-- the source of SABMiller's economic moat--puts the firm in pole position to exploit the long-term trend of the movement of consumers into branded consumer products in Africa. If ABI and SAB were to merge, we believe this would extend ABI's cost advantage from Latin America to Africa and create a formidable global brewer.
On the per capita consumption and margin opportunities, we are more skeptical. One of the conditions we think is necessary for per capita consumption in SABMiller's markets to rise is affordability. Using the ratio of GDP per
capita to revenue per hectoliter in each of the key markets of SABMiller and AB InBev, we measured the number of times GDP covers the wholesale cost of a hectoliter of beer and found that beer is more affordable in ABI's LatAm markets, with GDP per capita covering the wholesale price of a hectoliter of beer by 129 times in South America (excluding Brazil) and 115 times in Brazil, but only 50 times in SAB's LatAm markets. To address this affordability issue, we think ABI may be forced to redirect some of the cost savings away from the bottom line and toward a pricing affordability strategy, and we think investors may be disappointed by the ability of a combined ABI-SAB entity to execute on both margin expansion and volume growth simultaneously.
We also see valuation as an impediment to this deal. We modeled the combined ABI-SAB entity in our proprietary discounted cash flow model using a five-year explicit forecast period. Using our assumptions for the separate businesses, which when combined imply 5.6% average top- line growth over the next five years and our $1 billion in synergies and cash flow savings on top of modest organic margin expansion, we estimate that the deal would be value-enhancing to AB InBev below 17 times enterprise value/EBITDA (before synergies). This historically rich multiple yields an equity valuation in line with the current market price (although it would provide an 8% premium to our fair value estimate, which indicates that the market is pricing in a takeout premium). If a deal were to be struck at this valuation, we would reiterate our EUR 83 fair value estimate for AB InBev. At a valuation above 17 times EV/
EBITDA, we believe the deal would be value-destructive.
Despite its Cost Advantage in Other Markets, SAB’s LatAm Margins are Unlikely to Reach AmBev's Level 20 Jun 2014
SABMiller is the second-largest brewer in the world, selling
245 million hectolitres of lager in fiscal 2014. Investors often
overlook, however, that the firm is also one of the largest
Analyst Notes
Coca-Cola bottlers, and soft drinks accounted for almost 21% of volume last year, a differentiating factor for SABMiller among the brewers. We believe carbonated soft drinks are an important aspect of SABMiller's go-to-market strategy, and although lower margin, may enhance the firm's economic moat.
We suspect an integrated beer and CSD distribution model may not be optimal in developed markets, which make up less than half of SABMiller's EBIT, including associates.
Carbonated soft drinks have significantly higher SKUs, and the gap could widen further as demand for non-carbonated drinks drives SKU proliferation. In the U.S., for example, we estimate that the typical soft drink bottler distributes about 350 SKUs, around seven times as many as a brewer, and this creates differences in manufacturing and marketing logistics. Second, beer has a much longer lead time than CSDs (about 20 days, depending on the product, versus 1 day for CSDs) due to the fermentation process. Third, there are differences in the distribution channels of the heaviest volumes between beer and soft drinks. In the U.S. in 2013, 17% of bottled water was sold through non-store retailers, according to Euromonitor. For beer, that figure was less than 1%.
In Africa, however, we believe the early stage of the continent's economic development provides a better medium-term platform to leverage an integrated business model. The final stage of beverage distribution in Africa is often outsourced to small businesses with tiny sales territories, and distribution is more frequent and with lower volumes due to the lack of space and refrigeration facilities at the point of sale. This eliminates the differences in timing and quantities between beer and soft drinks, and allows for greater co-distribution than in developed markets. In addition, the need to build infrastructure from scratch allows an integrated model to better capture cost synergies from the initial investment, and this creates a cost advantage
that we believe will help to limit the encroachment of competition in both categories in the medium term.
Global Breweries Under Review 12 Jun 2014
We are placing Anheuser-Busch InBev, SABMiller, Heineken, AmBev, and Carlsberg under review while we transfer coverage to a new analyst and undertake a review of our assumptions.
SABMiller's Growth Decelerates but Problems Are Cyclical, Not Secular; Wide Moat Firmly Intact 15 Apr 2014
SABMiller's fourth-quarter and full-year trading update revealed stagnant volume in Europe and North America, but net producer revenue (NPR) growth of 3% was still ahead of our estimate. Nothing in the release changes our opinion that SABMiller's cost advantages through its scale (it controls around 15% of the global beer market) give it a wide economic moat. Further, because it earns a majority of its operating profits from developing and emerging countries, we think these regions have the potential to deliver volume growth over the long term. Once full fiscal 2014 financials are released May 22, we will reassess our near-term assumptions, but we do not expect any material change to our GBX 3,200 fair value estimate. Although the stock gapped down 2% at today's open, we view it as fairly priced.
In fiscal 2014, SABMiller's group NPR climbed 3%, driven by 2% higher NPR per hectoliter and volume growth in lagers (up 1%) and soft drinks (up 5%). Volume at the MillerCoors joint venture was flat year over year. Although there was a deceleration in consolidated NPR in the second half of the year (largely driven by Africa), management said trends improved in the fourth quarter. Geographically, organic NPR growth was highest in China (17%) and South Africa (6%).
In contrast to some other consumer product manufacturers,
and despite the concerns about the macroeconomic data in
Analyst Notes
the market, SABMiller is seeing accelerating growth in China (NPR growth was 14% in the first half of fiscal 2014) as its low-cost products continue to appeal to the growing middle classes. The slowdown in growth in Africa to 5%
from 11% in the first half of the year is a concern, as volume in Zimbabwe fell 18%. However, double-digit growth in Nigeria implies that SABMiller is not losing share in this critical market, and with volume declining in African markets with economic difficulties, we believe this is a cyclical rather than a secular issue.
We are also encouraged by an apparent second-half improvement in Europe, with pricing remaining intact in the on-premise channel. We believe these results support our belief that SABMiller's wide economic moat and growth opportunities should allow it to overcome these temporary challenges and generate mid-single-digit revenue growth in the long term.
Craft Beer Growth Helps Drive MillerCoors’ 2013 Performance 13 Feb 2014
During 2013 MillerCoors, the joint venture between SABMiller and Molson Coors, grew underlying net income 5.5% to $1.29 billion. Solid pricing growth and a more premium mix of brews helped MillerCoors’ net revenue per barrel climb 3.4% in the year, more than offsetting a 3%
decline in sales to wholesalers. On a product level, the company’s Coors Light brand saw volumes fall in the low single digits for the year, while Miller Lite’s volumes declined in the high single digits. The December 2013 launch of Miller Lite in the original can has been going well; this promotion will go national and run through at least the third quarter.
MillerCoors' craft beer division, Tenth and Blake, which delivered high single-digit growth during 2013, saw its growth slow to low single digits during the fourth quarter.
Tenth and Blake, which includes the Blue Moon and Leinenkugel’s brands, accounted for 29% of the craft beer
sector’s growth in the U.S. during 2013. As such, the premium portfolio now represents 14% of MillerCoors’ net revenue compared to 11% of sales in 2012.
During 2014, the JV will launch the Miller Fortune brand
and continue to support Redd’s Apple Ale, Leinenkugel’s,
and Blue Moon. We believe that 2014 will be much like
2013, with Tenth and Blake garnering the bulk of
MillerCoors’ growth, and with the Coors brand
outperforming the Miller brand.
Growth (% YoY)
3-Year
Hist. CAGR 2012 2013 2014
2015 20165-Year Proj. CAGR
Revenue 3.3 10.4 4.5 -4.3 4.6 5.0 5.6
EBIT -9.7 44.5 -11.2 -42.6 106.7 5.6 20.5
EBITDA -6.4 36.3 -7.6 -34.9 76.9 5.4 16.8
Net Income -26.1 69.5 -21.8 -69.6 294.3 0.2 39.9
Diluted EPS -26.6 68.0 -22.3 -69.7 292.0 -0.3 39.2
Earnings Before Interest, after Tax -159.2 21.7 33.5 -112.8 -1,316.8 7.8 —
Free Cash Flow -48.7 -368.0 -149.8 -89.9 926.3 11.5 67.8
Profitability
3-Year
Hist. Avg 2012 2013 2014
2015 20165-Year Proj. Avg
Operating Margin % 29.1 37.0 31.4 18.9 37.3 37.5 36.8
EBITDA Margin % 36.5 44.1 39.0 26.5 44.9 45.0 44.3
Net Margin % 16.8 25.3 19.0 6.0 22.7 21.7 23.4
Free Cash Flow Margin % -7.0 -44.5 21.2 2.3 22.0 23.4 22.8
ROIC % 3.7 5.2 6.9 -0.9 10.7 11.8 12.1
Adjusted ROIC % 3.8 5.2 7.2 -0.9 10.6 12.2 12.6
Return on Assets % 5.5 8.9 5.8 1.7 7.3 7.7 8.5
Return on Equity % 11.4 17.9 12.6 3.6 14.5 14.4 14.7
Leverage
3-Year
Hist. Avg 2012 2013 2014
2015 20165-Year Proj. Avg
Debt/Capital 0.41 0.43 0.41 0.39 0.37 0.30 0.25
Total Debt/EBITDA 3.06 2.61 2.73 3.85 2.09 1.61 1.35
EBITDA/Interest Expense 5.56 6.74 5.74 4.20 7.22 7.62 10.87
2013 2014
2015(E) 2016(E)Price/Fair Value 1.47 0.94 — —
Price/Earnings 28.3 80.8 23.3 23.4
EV/EBITDA 9.7 12.6 7.9 7.5
EV/EBIT 12.1 17.7 9.5 9.0
Free Cash Flow Yield % 4.1 3.3 8.1 8.9
Dividend Yield % 2.7 3.4 4.1 4.0
Cost of Equity % 9.0
Pre-Tax Cost of Debt % 6.0
Weighted Average Cost of Capital % 8.3
Long-Run Tax Rate % 28.0
Stage II EBI Growth Rate % 6.0
Stage II Investment Rate % 10.0
Perpetuity Year 20
USD Mil Firm Value (%) Per Share
Value
Present Value Stage I 17,595 17.4 10.88
Present Value Stage II 46,137 45.6 28.53
Present Value Stage III 37,410 37.0 23.13
Total Firm Value 101,142 100.0 62.53
Cash and Equivalents 2,081 — 1.29
Debt -17,047 — -10.54
Preferred Stock — — —
Other Adjustments -1 — 0.00
Equity Value 86,175 — 53.28
Projected Diluted Shares 1,617
Fair Value per Share —
Morningstar Analyst Forecasts
Forecast Fiscal Year Ends in March
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.
(GBX)
2012 2013 2014
2015 2016Revenue 16,713 17,458 16,704 17,473 18,352
Cost of Goods Sold 5,049 5,043 5,028 5,105 5,169
Gross Profit 11,664 12,415 11,676 12,368 13,183
Selling, General & Administrative Expenses 4,342 4,384 6,149 3,345 3,597
Other Operating Expense (Income) 1,330 1,121 997 1,094 1,197
Other Operating Expense (Income) -1,371 107 98 89 123
Depreciation & Amortization (if reported separately) 1,182 1,317 1,281 1,329 1,392
Operating Income (ex charges) 6,181 5,486 3,151 6,512 6,874
Restructuring & Other Cash Charges — — — — —
Impairment Charges (if reported separately) 16 81 115 — —
Other Non-Cash (Income)/Charges — — — — 919
Operating Income (incl charges) 6,165 5,405 3,036 6,512 5,956
Interest Expense 1,093 1,186 1,055 1,086 1,084
Interest Income 531 460 410 515 366
Pre-Tax Income 5,603 4,679 2,391 5,941 5,237
Income Tax Expense 1,126 1,192 1,173 1,607 1,553
Other After-Tax Cash Gains (Losses) — — — — —
Other After-Tax Non-Cash Gains (Losses) — — — — 919
(Minority Interest) -256 -237 -269 -363 -350
(Preferred Dividends) — — — — —
Net Income 4,221 3,250 949 3,971 4,253
Weighted Average Diluted Shares Outstanding 1,600 1,609 1,617 1,627 1,636
Diluted Earnings Per Share 2.64 2.02 0.59 2.44 2.60
Adjusted Net Income 4,234 3,310 1,007 3,971 3,981
Diluted Earnings Per Share (Adjusted) 2.65 2.06 0.62 2.44 2.43
Dividends Per Common Share 49.27 56.11 60.36 81.76 79.52
EBITDA 7,347 6,722 4,317 7,841 7,348
Adjusted EBITDA 7,363 6,803 4,432 7,841 8,266
Morningstar Analyst Forecasts
Income Statement (USD Mil)
Fiscal Year Ends in March Forecast
2012 2013 2014
2015 2016Cash and Equivalents 745 2,171 2,081 2,968 1,878
Investments 1 — — — —
Accounts Receivable 2,204 2,067 1,821 1,811 1,866
Inventory 1,248 1,175 1,168 1,264 1,332
Deferred Tax Assets (Current) 629 159 174 174 174
Other Short Term Assets 103 134 141 141 141
Current Assets 4,930 5,706 5,385 6,358 5,391
Net Property Plant, and Equipment 9,162 9,059 9,065 9,375 9,688
Goodwill 20,171 19,862 18,497 18,497 18,497
Other Intangibles 9,958 9,635 8,532 8,116 7,696
Deferred Tax Assets (Long-Term) 117 71 115 115 115
Other Long-Term Operating Assets 11,590 11,961 12,157 12,786 13,500
Long-Term Non-Operating Assets — — — — —
Total Assets 55,928 56,294 53,751 55,247 54,887
Accounts Payable 4,127 4,004 3,847 3,992 4,207
Short-Term Debt 1,062 2,469 4,519 4,584 2,924
Deferred Tax Liabilities (Current) 1,323 1,460 1,106 1,106 1,106
Other Short-Term Liabilities 751 593 528 434 458
Current Liabilities 7,263 8,526 10,000 10,117 8,695
Long-Term Debt 18,164 16,079 12,528 11,823 10,389
Deferred Tax Liabilities (Long-Term) 3,719 3,507 3,246 3,246 3,246
Other Long-Term Operating Liabilities 750 722 495 516 543
Long-Term Non-Operating Liabilities — — — — —
Total Liabilities 29,896 28,834 26,269 25,701 22,873
Preferred Stock — — — — —
Common Stock 166 167 167 167 167
Additional Paid-in Capital 6,480 6,581 6,648 6,948 7,248
Retained Earnings (Deficit) 11,863 13,710 15,885 17,622 19,690
(Treasury Stock) — — — — —
Other Equity 6,564 5,914 3,619 3,619 3,619
Shareholder's Equity 25,073 26,372 26,319 28,356 30,724
Minority Interest 959 1,088 1,163 1,190 1,290
Total Equity 26,032 27,460 27,482 29,546 32,014
Morningstar Analyst Forecasts
Balance Sheet (USD Mil)
Fiscal Year Ends in March Forecast
2012 2013 2014
2015 2016Net Income 4,477 3,487 3,578 4,334 4,603
Depreciation 909 867 854 913 972
Amortization 273 450 427 416 420
Stock-Based Compensation 132 184 141 — —
Impairment of Goodwill 16 81 115 — —
Impairment of Other Intangibles — — — — —
Deferred Taxes — — — — —
Other Non-Cash Adjustments -2,644 -1,232 -2,214 — —
(Increase) Decrease in Accounts Receivable -25 -107 128 10 -55
(Increase) Decrease in Inventory -45 -14 -73 -96 -68
Change in Other Short-Term Assets — — — — —
Increase (Decrease) in Accounts Payable 374 82 113 145 215
Change in Other Short-Term Liabilities -46 -165 -75 -94 23
Cash From Operations 3,421 3,633 2,994 5,628 6,110
(Capital Expenditures) -1,473 -1,335 -1,401 -1,223 -1,285
Net (Acquisitions), Asset Sales, and Disposals -10,651 111 119 — —
Net Sales (Purchases) of Investments -166 -144 -84 — —
Other Investing Cash Flows 1,206 1,173 1,105 -608 -686
Cash From Investing -11,084 -195 -261 -1,831 -1,971
Common Stock Issuance (or Repurchase) 124 85 24 300 300
Common Stock (Dividends) -1,324 -1,517 -1,640 -2,234 -2,185
Short-Term Debt Issuance (or Retirement) — — — 65 -1,660
Long-Term Debt Issuance (or Retirement) 8,856 -566 -1,253 -705 -1,434
Other Financing Cash Flows -276 37 107 -336 -250
Cash From Financing 7,380 -1,961 -2,762 -2,910 -5,229
Exchange Rates, Discontinued Ops, etc. (net) -39 -51 -61 — —
Net Change in Cash -322 1,426 -90 887 -1,090
Morningstar Analyst Forecasts
Cash Flow (USD Mil)
Fiscal Year Ends in March Forecast
Company/Ticker Price/Fair
Value 2014
2015(E) 2016(E)2014
2015(E) 2016(E)2014
2015(E) 2016(E)2014
2015(E) 2016(E)2014
2015(E) 2016(E)Anheuser-Busch Inbev SA ABI BEL 1.00 21.4 18.9 18.1 12.2 11.2 10.5 19.1 17.7 17.2 3.3 3.1 2.8 3.9 3.7 3.5
Carlsberg AS CARL B DNK 0.92 15.0 13.7 12.7 8.7 8.1 7.7 28.4 13.0 9.3 1.2 1.1 1.0 1.3 1.3 1.2
Heineken NV HEIA NLD 0.99 17.9 14.7 13.1 9.1 8.3 7.7 18.0 13.4 11.8 2.5 2.7 2.9 1.6 1.5 1.5
Molson Coors Brewing Co TAP USA 1.29 17.1 16.1 16.2 10.7 10.4 10.1 14.1 13.4 13.7 1.3 1.2 1.2 2.7 2.7 2.6
Boston Beer Co Inc SAM USA 1.24 35.1 28.3 22.8 16.5 13.6 11.4 NM 42.3 23.8 7.5 6.5 6.5 3.2 2.8 2.5
Average 21.3 18.3 16.6 11.4 10.3 9.5 19.9 20.0 15.2 3.2 2.9 2.9 2.5 2.4 2.3
SABMiller PLC SAB GB 1.06 80.8 23.3 23.4 12.6 7.9 7.5 30.2 12.4 11.3 1.8 1.9 1.8 2.9 3.1 3.0
Company/Ticker Total Assets
(Mil) 2014
2015(E) 2016(E)2014
2015(E) 2016(E)2014
2015(E) 2016(E)2014
2015(E) 2016(E)2014
2015(E) 2016(E)Anheuser-Busch Inbev SA ABI BEL — USD 10.7 11.7 11.3 10.8 11.9 12.3 16.6 17.4 16.7 6.1 6.9 7.0 2.3 2.7 2.9
Carlsberg AS CARL B DNK — DKK 6.4 6.8 6.5 6.6 7.5 7.5 8.9 9.0 9.1 4.1 4.2 4.3 1.6 1.2 1.7
Heineken NV HEIA NLD — EUR 10.9 12.1 12.7 13.1 14.8 16.0 14.5 16.4 18.4 4.9 5.4 5.5 2.6 2.7 2.7
Molson Coors Brewing Co TAP USA — USD 7.1 7.4 7.2 8.6 9.1 8.8 8.7 8.7 8.2 4.9 5.1 4.9 2.2 2.3 2.2
Boston Beer Co Inc SAM USA — USD 20.4 22.8 28.4 20.6 23.0 28.6 25.0 25.5 28.6 16.8 17.5 20.5 — — —
Average 11.1 12.2 13.2 11.9 13.3 14.6 14.7 15.4 16.2 7.4 7.8 8.4 2.2 2.2 2.4
SABMiller PLC SAB GB 53,751 USD -0.9 10.7 11.8 -0.9 10.6 12.2 3.6 14.5 14.4 1.7 7.3 7.7 3.4 4.1 4.0
Company/Ticker Revenue
(Mil) 2014
2015(E) 2016(E)2014
2015(E) 2016(E)2014
2015(E) 2016(E)2014
2015(E) 2016(E)2014
2015(E) 2016(E)Anheuser-Busch Inbev SA ABI BEL 47,489 USD 9.9 4.5 4.4 3.7 10.1 7.6 -5.0 13.4 4.3 199.1 7.4 4.3 -32.3 13.6 6.7
Carlsberg AS CARL B DNK 65,779 DKK 2.2 3.8 4.7 13.7 11.6 5.7 6.0 8.9 8.4 -436.0 -235.1 48.3 46.2 -23.4 39.4
Heineken NV HEIA NLD 19,409 EUR 1.1 3.4 5.2 16.5 14.1 8.1 32.8 22.2 11.8 -20.8 32.1 17.5 12.6 10.3 6.4
Molson Coors Brewing Co TAP USA 4,324 USD 2.8 2.7 2.6 7.8 3.7 2.1 9.6 6.6 -0.7 -6.0 5.4 -3.6 9.5 6.6 -0.7
Boston Beer Co Inc SAM USA 905 USD 22.4 14.9 12.3 21.5 23.1 20.4 22.2 24.2 23.9 NM -206.1 77.9 — — —
Average 7.7 5.9 5.8 12.6 12.5 8.8 13.1 15.1 9.5 -65.9 -79.3 28.9 9.0 1.8 13.0
SABMiller PLC SAB GB 16,704 USD -4.3 4.6 5.0 -42.6 106.7 5.6 -69.7 292.0 -0.3 -89.9 926.3 11.5 7.6 35.5 -2.7
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) 2014
2015(E) 2016(E)2014
2015(E) 2016(E)2014
2015(E) 2016(E)2014
2015(E) 2016(E)2014
2015(E) 2016(E)Anheuser-Busch Inbev SA ABI BEL 8,732 USD 59.8 59.7 59.8 38.5 40.0 40.8 32.4 34.1 35.2 18.4 20.1 20.2 20.2 20.8 20.6
Carlsberg AS CARL B DNK 6,074 DKK 51.2 50.1 50.4 21.3 21.8 21.9 16.2 17.4 17.6 9.2 9.7 10.0 4.7 9.8 13.1
Heineken NV HEIA NLD 1,717 EUR 59.7 59.5 59.3 23.0 24.5 24.9 15.6 17.3 17.8 8.8 9.7 9.7 8.8 11.4 12.3
Molson Coors Brewing Co TAP USA 770 USD 42.4 42.6 42.6 33.0 33.2 33.0 25.1 25.3 25.2 17.8 18.3 17.3 19.4 19.9 18.9
Boston Beer Co Inc SAM USA 86 USD 52.5 52.5 55.2 19.4 20.5 21.7 15.4 16.5 17.7 9.5 10.2 11.0 -7.2 6.6 10.5
Average 53.1 52.9 53.5 27.0 28.0 28.5 20.9 22.1 22.7 12.7 13.6 13.6 9.2 13.7 15.1
SABMiller PLC SAB GB 1,007 USD 69.9 70.8 71.8 26.5 44.9 45.0 18.9 37.3 37.5 6.0 22.7 21.7 9.5 25.2 26.3
Company/Ticker Total Debt
(Mil) 2014
2015(E) 2016(E)2014
2015(E) 2016(E)2014
2015(E) 2016(E)2014
2015(E) 2016(E)2014
2015(E) 2016(E)Anheuser-Busch Inbev SA ABI BEL 46,848 USD 85.4 68.6 68.7 46.1 40.7 40.7 7.8 9.7 9.4 2.6 2.1 2.1 2.6 2.4 2.4
Carlsberg AS CARL B DNK 43,276 DKK 59.5 58.0 51.2 37.3 36.7 33.9 6.7 6.1 6.5 3.1 3.1 2.8 2.2 2.1 2.1
Heineken NV HEIA NLD 11,584 EUR 94.0 110.9 129.1 48.5 52.6 56.4 11.7 11.1 8.7 2.6 2.6 2.6 2.9 3.2 3.5
Molson Coors Brewing Co TAP USA 3,900 USD 42.6 36.9 33.0 29.9 27.0 24.8 7.5 7.7 8.0 2.7 2.4 2.1 1.8 1.7 1.6
Boston Beer Co Inc SAM USA 35 USD 9.0 4.5 — 8.3 4.3 — — — — 0.2 0.1 — 1.5 1.4 1.4
Average 58.1 55.8 70.5 34.0 32.3 39.0 8.4 8.7 8.2 2.2 2.1 2.4 2.2 2.2 2.2
SABMiller PLC SAB GB 17,047 USD 64.8 57.9 43.3 39.3 36.7 30.2 4.2 7.2 7.6 3.8 2.1 1.6 2.0 1.9 1.8
Company/Ticker Market Cap
(Mil) 2014
2015(E) 2016(E)2014
2015(E) 2016(E)2014
2015(E) 2016(E)2014
2015(E) 2016(E)2014
2015(E) 2016(E)Anheuser-Busch Inbev SA ABI BEL 135,504 EUR 7.03 6.23 11.02 0.85 0.93 1.15 0.71 0.77 1.00 1.93 3.95 3.01 48.8 48.9 50.0
Carlsberg AS CARL B DNK 87,252 DKK 18.79 65.35 103.44 0.59 0.76 0.79 0.44 0.63 0.68 0.31 0.89 0.97 22.1 15.5 20.0
Heineken NV HEIA NLD 30,805 EUR 6.48 7.20 8.56 1.30 1.30 1.20 1.05 1.05 0.98 6.95 6.69 3.43 46.6 42.1 40.0
Molson Coors Brewing Co TAP USA 11,815 USD 5.74 5.81 5.95 1.29 1.30 1.31 1.17 1.18 1.18 5.23 5.24 5.25 33.0 33.0 33.0
Boston Beer Co Inc SAM USA 2,916 USD 1.44 1.82 0.34 0.89 1.09 1.15 0.49 0.59 0.56 0.56 1.23 — — — —
Average 7.90 17.28 25.86 0.98 1.08 1.12 0.77 0.84 0.88 3.00 3.60 3.17 37.6 34.9 35.8
SABMiller PLC SAB GB 54,493 GBP 1.29 1.82 1.15 0.54 0.63 0.62 0.42 0.50 0.47 0.46 0.65 0.64 172.9 56.3 51.4
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.
