Companies with strong competitive advantages, strong balance sheets and attractive valuations are essentially the core of what we are looking for. Why? Because if our timing is off, the company’s solid fundamentals should ensure that any potential loss would get rescued. This can work both with long stock positions or option positions that have a bullish stance. The most glaring example of this is in the 2008 financial crisis. Many stocks which had already proven themselves in the past roared back to new highs within a year or two of the bottom. Many of these companies were obviously dividend growth stocks and astute traders/investors used the downturn to double down on these stocks whilst also collect the increasing dividends.
At present, we look to have a nice set-up in Anheuser Busch Inbev before its Q1 earnings (NYSE:BUD) for a variety of reasons.
- Firstly the stock’s price to book ratio of 2.5 is trading well below its 5 year average of 3.8. In fact, the present book value per share is $44 which is well below the industry’s average 5.0 number along with the S&P’s 3.0 number.
- Brazil is on the main reasons in my opinion why Anheuser’s volumes have been struggling lately. This is primarily due to the desperate recession this country has been experiencing which actually deepened at the back end of last year. However the first quarter of this year seems to have signaled the end of the recession which has to be encouraging for both the country’s spending habits and Anheuser Busch. Why? Well beer consumption is actually highly correlated with GDP growth meaning that if Brazil can string a few quarters of positive growth together, one would think that consumption would also have to rise.
- Over the next five years, analysts are expecting an average earnings growth clip of almost 20%. Furthermore with gross margins remaining over 60% and revenue growth (32% growth rate in its latest quarter) expectations very bullish, I think it will be only a matter of time before the stock returns back towards former average book ratios. The company is the number 1 global brewer and its scale is unmatched in this industry. Expect plenty more acquisitions and consistent cost cutting measures. Its gross and operating margins remain unmatched in the industry. In one way, this stock is a good play on global economic growth. The stock looks cheaper than the market here and is paying out a higher dividend of 3.6%
The stock may blast through its 200 day moving average before earnings are announced or it may drift back down to short term oversold conditions. Long exposure is recommended here before a nice expected move.