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Profiting From the Bud Light Brouhaha

Barchart - Fri May 26, 2023

On April 1st 2023, Bud Light began a controversial ad campaign which immediately sent shockwaves through its loyal consumer base. As the outrage grew, it became abundantly clear that this may have a significant impact on the popular Bud Light brand, the #1 selling beer in America. In the ensuing 2 months, the share price of Bud Light’s parent company AB InBev (BUD), has fallen over 15%! The consensus on the street is that there is more downside pain for the stock price, and judging by the price chart, you wouldn’t be wrong. However, this may be an overdone knee jerk reaction to a botched marketing campaign. When you peel back the curtain to reveal the composition of AB InBev stock, it may be painting the picture of a great buying opportunity. 

At first glance, the Bud Light reaction has been brutal. Social media is filled with unhappy customers destroying bottles, cans and kegs of Bud Light in open protest. Neilson Ratings says that as of May 6th, sales have dropped 23.6%. Undoubtedly this is going to hurt a company’s bottom line. But how bad? According to JPMorgan analyst, Jared Dinges earning will slide 26% this year and the current share price is pricing in a 45% drop in U.S. EBIT. 

  If this was just a two-trick pony with Bud and Bud Light, the damage to earnings would be severe. For example, if a pharmaceutical company has 1 drug product and that product fails, the company is finished. But if you were to invest in VanEck Pharmaceutical ETF (PPH) which is comprised of about 37 different companies, many with multiple products, the failure of one product will not impact the overall ETF as significantly.

This is the case with AB InBev. It is the largest beer company in the world with over 500 different beer products. Essentially, it is a giant Beer ETF. While there is one product struggling at the moment, there are hundreds of others to pick up some of the slack. All the disgruntled Bud Light drinkers are not going to stop drinking beer. They are simply going to switch their allegiance temporarily or permanently. Maybe they switch and start drinking Stella Artois, Natural “Natty” Light, Busch, Becks,  or Michelob. All of these are owned by AB InBeV. They even own Modelo and Corona beers outside the United States. Domestically, the rights to Modelo and Corona belong to Constellation Brands (STZ). 

According to AB InBev’s Annual Report, the US is the largest market, followed closely by Central American and South America. 

With the above leadership in sales, only 29% of their revenue came from the U.S. sales.

The boycott of Bud Light is largely a United States phenomenon and unlikely to spread to other countries. Even if sales of Bud Light erased 50% of all their U.S. beer sales, it should only knock off about 14% share price. We’re well past that now, and US sales are only down 23%. The consumers who comprised that 23% drop in sales are going to find another brand, and the odds are good that it will be another product in the InBev family. Based off this information, it appears that AB InBev is oversold and may present a buying opportunity for investors looking to take on a higher level of risk. 

On the price chart I’ve added Bollinger Bands which show price hugging the lower portion of the band. While this does not indicate a buy signal yet, the further it declines, the greater the probability of a pop back up in price. Stochastics, at the bottom of the chart, indicates a severely oversold situation as well. 

Buying right now is risky as the indicators and price itself do not show any signs yet of pausing and turning upward. I’m looking for price to fall into a demand zone before buying. The first demand zone is located between $54-$55. In anticipation of buying BUD at $55, I sold the June 16th $55 puts on BUD for $.73 premium. This allows me to wait for price to hit my level and collect premium on top of that. 

It doesn’t matter if you believe the marketing performed by the Bud Light team was right or wrong. As traders or investors, we must look at the good and the bad as a series of perpetual opportunities for us to grow our accounts over time. I for one feel there is good value in AB InBev stock going forward. I raise my Becks (another InBev product) to you in a hearty toast to the upcoming weekend! Cheers!

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On the date of publication, Merlin Rothfeld had a position in: BUD. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.

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