Anheuser-Busch InBev (BUD -0.71%) stock rose 2.8% through 12:05 p.m. ET on Monday after UBS analyst Sanjeet Aujla upgraded shares of the beer giant to buy, and raised its price target to 72 euros (about $77.30).
Previously, Aujla had a neutral rating on the stock, and a price target of 62.5 euros (about $67.10).
What UBS says about Anheuser-Busch
The analyst likes three things about Anheuser-Busch stock: growth, profit margins, and cash returns, as described today in a note on Street Insider.
Looking out 12 months, Aujla forecasts that the company will grow its product volume 1.5% to 2% and it will raise prices no more than the rate of inflation so as to not upset consumers. Despite the pricing restraint, Aujla says Anheuser-Busch should be able to expand its profit margins and generate free-cash-flow (FCF) growth of as much as 7%.
The analyst calls the above scenario "the ideal consumer staples growth profile," and believes it makes Anheuser-Busch InBev stock a buy, and at a discounted valuation compared to other European consumer goods stocks.
Is Anheuser-Busch stock a buy?
Valued at 25.4 times earnings today, Anheuser-Busch stock doesn't look particularly cheap. Relative to the consensus long-term earnings growth rate of 12.5%, the stock actually costs a bit more than a 2 PEG ratio. (Value investors tend to prefer stocks trading for less than 1.)
Is the free-cash-flow picture any better? Last year Anheuser-Busch generated FCF of $8.6 billion -- significantly more than its $5.3 billion in reported net income. However, the company carries significant debt -- $68 billion more than its cash on hand -- resulting in an enterprise value of $188 billion, and an enterprise value-to-free-cash-flow ratio of 21.9, which is even more expensive than its P/E ratio, not less.
All things considered, even if Aujla is right in all other respects -- volumes will grow, prices will be stable, and free cash flow will expand modestly -- I still think Anheuser-Busch stock costs too much. To me, it's not yet a buy.
