AB InBev: 22% EPS Growth as China Slides: Rapid Earnings Reaction

AB InBev's (NYSE: BUD) third-quarter earnings got a lift from premium beers and a lighter interest bill. But the brewer's operating performance wasn't quite as strong as its 22% increase in underlying earnings per share might suggest.

Underlying EPS reached $1.21, while reported basic EPS came in at $0.81. Normalized EBITDA grew a more modest 3.9% organically, and margins narrowed as marketing spending and commodity costs rose.

The quarter's key numbers

• Revenue: $16.5 billion, up 4.9% organically.
• Normalized EBITDA: $5.96 billion, up 3.9% organically.
• EBITDA margin: 36.1%, down 34 basis points organically.
• Underlying EPS: $1.21, up 22.4%, or 13.9% in constant currency.
• Asia Pacific EBITDA: Down 22.4% organically, with a margin of 24%.

Premium beers helped, but costs took a bite

AB InBev brought in more revenue without selling much more beer. Total volumes rose 0.4% organically, while beer volumes slipped 0.1%. Revenue per hectoliter increased 4.2%, supported by pricing strategies and a shift toward premium beers and Beyond Beer products.

Corona and Michelob Ultra stood out, with revenue outside their home markets rising 20% and 50%, respectively. Combined megabrand revenue grew by 7.7%, outpacing the overall portfolio.

But those sales gains didn't translate into equally strong profit growth. Higher marketing spending and commodity costs held EBITDA growth below revenue growth and squeezed margins.

The earnings jump needs some context

Lower financing costs helped explain why earnings grew faster than operating profit. Net finance expense fell to $908 million from $1.165 billion a year earlier, including a $75 million reduction in net interest expense.

Currency translation also provided a sizable boost. Underlying EPS grew 22.4% as reported, compared with 13.9% in constant currency. A modest decline in the weighted-average share count helped, too.

Those benefits matter to shareholders, but they shouldn't be mistaken for faster growth in the beer business. The quarter's earnings increase reflected both operating gains and a more favorable financing and currency backdrop.

The board also raised the interim dividend to 0.40 euros per share from 0.15 euros. Management said a stronger balance sheet and cash generation were giving the company more flexibility in how it allocates capital.

Middle Americas delivered as the U.S. and China struggled

Middle Americas, which includes Mexico, Colombia, and Peru, was a bright spot. Organic revenue rose 12.1%, while EBITDA increased 15.6% and margins expanded.

The U.S. told a different story. Revenue declined 1.2% and EBITDA fell 4%, despite market-share gains reported by the company using Circana data. Higher revenue per hectoliter couldn't offset lower sales volumes, while marketing investment and elevated commodity and transportation costs weighed on profit.

China's results were weaker still. Volumes and revenue both fell 16.8%, and EBITDA dropped 30.5%. AB InBev pointed to abnormal weather, continued weakness in bars and restaurants, and inventory management as factors affecting performance.

What investors should watch

U.S. businesses need to show that market-share gains can translate into revenue and profit growth. In China, the next question is whether volume declines ease after a quarter in which AB InBev estimated that it underperformed an already weak industry.

Margins are another key measure. Premium brands are helping AB InBev generate more revenue per hectoliter, but higher costs and marketing spending are absorbing some of that benefit. Stronger operating growth--not just a lower financing bill--would make the earnings story more convincing.

Savannah Maxwell has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.