Chart of the Day – Anheuser-Busch InBev (BUD)

by riskreversal November 28, 2016 2:06 pm • Chart of the Day

Shares of Anheuser-Busch InBev (BUD) are down 23% from their 52 week and all time highs made in late September, and down 16% on the year.  After a nearly 7 month consolidation between the low $120s and the low $130s, it was the rally in the dollar in the last month that likely caused the bloodletting. The company gets nearly 65% of their sales from outside the U.S.  $120, former technical support now appears to be formidable technical resistance:

[caption id="attachment_68444" align="aligncenter" width="600"]BUD 1yr chart from Bloomberg BUD 1yr chart from Bloomberg[/caption]

The recent decline places the stock below the uptrend that has been in place since its lows in 2011, while finding a tad bit of support above $100:

[caption id="attachment_68445" align="aligncenter" width="600"]BUD since 2009 from Bloomberg BUD since 2009 from Bloomberg[/caption]

As stated above, the US dollar move can certainly be to blame for some of the stock’s recent weakness, but the rise in interest rates since the U.S. presidential election has put pressure on consumer staples stocks with a yield, and also the protectionist rhetoric from the incoming administration may also be weighing on BUD’s non US produced products.

Earlier in the year BUD’s $105 billion acquisition of rival SAB Miller was approved by regulators and both boards, and the company recently doubled their cost saving target (think job cuts) to $1 billion by 2020.

There’s also the ever present threat of expanding craft beer market share cutting into sales of some of BUD’s mass market beers. But the company has seemed to take a “if you can’t beat ’em, join ’em, and then crush ’em” policy on this and has been scooping up regional brands like Goose Island in the Midwest, Breckenridge in the Rockies, 10 Barrel in the Northwest and Blue Point in the Northeast to make sure they’re represented on the craft beer shelves. And with their distribution muscle, they will be.

BUD trades about 21x expected 2017 eps of $4.90 on combined sales of about $57 billion, with a dividend yield of about 3.3%.  For comparison sake, Pepsi (PEP) with expected sales of $67 billion trades 20x expected 2017 eps and Coca-Cola (KO) trades 21x.

So What’s the Trade?
*BUD (104.50) Buy the Jan/March 110 call calendar for 2.00
  • Sell 1 Jan 110 call at 1.50
  • Buy 1 March 110 call for 3.50

Rationale – This trade risks does best with the stock here or above, but not substantially above 100 on Jan expiration. If the Jan calls expire worthless, March calls can then be spread. They capture the next earnings event that happens after Jan expiration. On any continuation of the selling the trade will define risk to just 2 dollars and using a stop below of about 50% means you’d only be risking about $1. After Jan expires there is a tremendous amount of upside available if the stock can get back to 120 or so my March expiration.