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The King of Beers Is Sitting on a Throne of Debt
(Bloomberg Opinion) -- The pandemic hasn’t hammered the company behind Budweiser as much as many had feared.Sales and underlying earnings at Anheuser-Busch InBev all came in better than expected. Shares rose as much as 11% after its Thursday earnings announcement.Even with this brighter picture, the so-called Megabrew still needs to tackle its mega debt, which stood at $87.4 billion at the end of June — 4.9 times its earnings before interest, tax, depreciation and amortization. AB InBev has done a decent job of cutting its borrowings from more than $100 billion since purchasing SABMiller in 2016. It has refinanced to take advantage of favorable interest rates and pushed out the time frame for repaying its bonds. It also repaid its $9 billion revolving credit facility in full in June. As long as it retains an investment-grade credit rating, it should be able to keep managing its debt.But with earnings being hit in key markets such as the U.S., Mexico and South Africa, the company’s leverage ratio still looks too high.Luckily, the Belgian multinational has a few levers it can pull, even if some aren’t so palatable.Eliminating its dividend for 2020 would be the simplest move. This would save about $4 billion over the course of the full year. The group could sell off some of its stakes in other companies. It still holds 62% of Brazilian brewer Ambev SA and 87% of Budweiser Brewing Co APAC Ltd. Taking both of these down to 51% could raise more than $20 billion at current valuations. It might not be possible to reduce its stake in the Asian business all at once, but if done in stages, it could be helpful.Another option is to dispose of some of its own divisions, and a couple stand out. Late last year, Reuters reported that AB InBev was looking at a minority stake sale or joint venture for its U.S. canning business. This would be a good move because, assuming the group retains control, it could generate proceeds of $2-3 billion, according to analysts at Jefferies. Another logical divestment would be its business in South Korea, which it had sold in 2009 to KKR & Co. and bought back in 2014. This could generate another $3.7 billion, according to Jefferies. Combining these corporate actions with foregoing the dividend could generate more than $30 billion. This would reduce borrowings to under $50 billion, and based on the Bloomberg analysts’ estimates of net debt being just over $80 billion at the end of 2021, this would imply a net debt to Ebitda ratio of 2.7 times, a level at which investors would feel more comfortable.Reassurance on borrowings would also be useful given that AB InBev carries a significant amount of goodwill: $115 billion on its balance sheet as of June 30. A slow recovery or a second virus wave could seriously damage the future cash potential of its brands. On Thursday, the company took a $2.5 billion non-cash impairment on its African business. Duncan Fox of Bloomberg Intelligence says more write-downs can’t be ruled out yet.AB InBev should get some relief from a weak dollar, which increases the value of its earnings in emerging markets, and an increase in beer volumes in June bodes well for the second half of the year. But with changing drinking habits and the risk of more Covid-19 flare-ups, getting to grips with its debt once and for all should be a priority. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.For more articles like this, please visit us at bloomberg.com/opinionSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
J.P. Morgan: Time to Turn Bullish on These 3 Stocks
The markets have been showing mixed messages lately. A look at the chart shows that the NASDAQ’s rate of climb has been slowing recently, although it remains at record high levels. At the same time, the S&P 500 is holding just over 3,200, putting the index back within 5% of its all-time peak. At the same time, uncertainty is up. The coronavirus has come back for a ‘second wave,’ prompting shutdown orders once again – although, with the exception of California, the shutdowns are somewhat less extensive than this past spring. The riots in major urban centers continue, along with the related political shenanigans that always precedes the quadrennial elections. And just for kicks, it’s earnings season, too.From investment bank JPMorgan, strategist Marko Kolanovic has taken a wide-angle look at the big picture. Pointing out that Q2 GDP contracted sharply, Kolanovic adds that earnings are going to be grim this quarter. However, he says, “investors may largely look through the overall weak 2Q performance to focus more on guidance and commentary on intra-quarter trends.”Kolanovic gets to the heart of the Q2 ambivalence: “US GDP shrank in the second quarter, as expected, due to the COVID-19 pandemic, and market watchers are predicting aggregate earnings to be down 45% year-over-year, in the worst performance since the financial crisis of 2008. But … Q3 is expected to see sharp economic rebound when the coronavirus finally subsides.” Bearing this in mind, we used TipRanks’ database to take a closer look at three stocks that just received J.P. Morgan's stamp of approval. What’s more, in addition to receiving a higher rating, the firm sees each surging by at least 30% in the year ahead.AutoNation (AN)First on the list is AutoNation, a nationwide retailer of new and used cars, parts, and service. The company has over 360 physical locations, as well as a major online presence, and saw $21 billion in revenues last year.With the social lockdown policies in place, it may seem that a car retailer would have had trouble in 1H20. However, AutoNation benefitted from its online sales – customers could order their vehicle, and only show up at the brick-and-mortar location for pick-up. It’s a sales model that minimized social contact – and was perfect during the COVID-19 crisis. AN reported strongly positive earnings in Q1 and Q2, beating expectations in both quarters. EPS grew sequentially, from Q1’s 91 cents to Q2’s $1.41. Revenue in Q2 was $4.5 billion.JPM’s Rajat Gupta was impressed by AutoNation’s first-half performance, and upgraded his stance on the stock. Gupta wrote, “We commend AN on its strategy to build an integrated, brand-centric approach to auto retail via a cohesive experience that spreads across multiple automotive segments, including core franchised locations, exclusive used retail dealerships, branded parts & accessories, and digital channels, as well as indirectly via auctions… We also see recent de-leveraging and improving execution as positive.”In addition to upgrading AN to a Buy, Gupta set a $70 price target, suggesting a 30% upside for the stock. (To watch Gupta’s track record, click here)Overall, AutoNation has Moderate Buy rating, which is derived from 8 reviews, including 3 Buys, 4 Holds, and 1 Sell. Shares are selling for $54.15, and the average target price of $58.71 indicates room for modest growth of 8%. (See AutoNation stock analysis on TipRanks)Marathon Oil Corporation (MRO)Next up is another JPM upgrade. Marathon Oil is spin-off of Marathon Petroleum; it has been separate since 2011. MRO handles exploration and production, focusing both on Texas’ Eagle Ford, New Mexico’s Permian, and North Dakota’s Bakken. These are some of the richest oil formations in North America, and over the past decade have made the US a net exporter of petroleum products.The corona crisis has been hard on the oil industry, and like its peers, MRO has felt the pain. Lockdowns and slowing economies have reduced demand, creating a supply glut. The April dip of WTI (the US benchmark price for crude oil) into negative territory, even temporarily, was a heavy shock to the industry, and prices have barely recovered. MRO shares are down by more than half form their 2020 peak level. As part of an effort to preserve capital, the company suspended its 3.5% dividend during the first quarter.But not all was doom & gloom. MRO reported better-than-expected revenues in Q1, even as earnings turned negative. The top line, at $1.23 billion, was also up from the year-ago value of $1.20 billion. MRO reports Q2 results in August; we’ll have to wait until then to see if the company’s efforts at improving capital and liquidity have been successful.Covering this stock for JPM, analyst Arun Jayaram upgrades from Neutral to Buy, saying, “[We] believe the bear narrative on the stock (downside oil production risk and the lack of perceived inventory depth) is already discounted into the stock. We expect MRO to reiterate its 2020 oil production view of 187 MBo/d (190 MBo/d less 3 MBo/d of 2Q curtailments) and capex below $1.3 billion…”In line with this outlook, Jayaram set an $8 price target, implying room for a strong 42% upside in the coming year. (To watch Jayaram’s track record, click here.)Overall, however, Wall Street is not so upbeat on this one. The conventional wisdom gives MRO a Hold; that analyst consensus rating comes from 1 Buy, 10 Holds, and 3 Sells. The average price target is $6.81, however, suggesting an upside of 20% from the current trading price of $5.63. (See MRO stock analysis on TipRanks)Apache (APA)Last on our list, Apache, is another hydrocarbon exploration company. The company got its start in Oklahoma in the 1950s, and today has operations in the Texas Permian Basin, along the Gulf Coast, and offshore in the Gulf of Mexico. Internationally, Apache operates in Egypt’s Western Desert and in the North Sea off the coast of Scotland. Apache saw $6.3 billion in top-line revenue during 2019.The company took a heavy blow in Q1, however, as quarterly revenues fell 21% year-over-year to $1.28 billion. EPS dropped to a net loss of 13 cents. Looking ahead to Q2, the company expects to show a net loss of 97 cents per share.One important weight on the oil industry is the Democratic Party’s hostility to hydrocarbon exploration. The Party is committed to a greener economy, and with Joe Biden leading the polls for the November election, investors have to take that into account. JPM's Arun Jayaram notes this, when he writes, “[We] believe APA would be a beneficiary if a moratorium on federal acreage occurs given the company's international footprint in the North Sea and Egypt. One of the underappreciated aspects to the story is the ability of the company to create drillbit value in Egypt post the reprocessing of modern vintage 3-D seismic in new license areas.”Jayaram upgrades APA, setting a Buy rating on the stock, and his $18 price target indicates confidence in a one-year upside of 32%. (To watch Jayaram’s track record, click here)Overall, Wall Street’s conventional wisdom just isn’t ready to abandon caution on oil explorers just yet. APA's Hold consensus rating comes from 18 reviews, breaking down to 5 Buy ratings, 12 Holds, and 1 Sell. The average price target is $15.03, suggesting a 10% upside potential from the current share price of $13.65. (See Apache’s stock-price forecast on TipRanks)To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.
Intel Emerges as Symbol of Big Tech’s Decline
(Bloomberg Opinion) -- As if to symbolize U.S. decline, a giant of American industry is being overtaken by foreign rivals. Intel Corp., the company that once marked U.S. dominance of the semiconductor industry, has announced that the introduction of its new flagship series of computer chips, 7nm CPUs, will be a year behind schedule. This is after its previous generation of chips, 10nm CPUs, took much longer than expected.Intel, unlike many semiconductor companies, designs and fabricates its own chips. On the design front, it’s being overtaken by domestic rivals and U.K.-based ARM Ltd., which recently snatched Apple Inc.’s business away from Intel. On the fabrication side, Intel is losing ground to Taiwan’s TSMC, which specializes in manufacturing chips for other companies and which has had little trouble making its own new generations of chips on time. TSMC now has a higher market value of the two companies:Intel’s failures probably come as a result of various factors that are specific to the company itself. Some observers say that by insisting on vertical integration, Intel missed out on the opportunity to learn from the innovations generated by other companies (it’s now working on switching to a less integrated model). Its focus on its existing high-end markets caused it to stumble in newer markets for cheaper chips -- a classic case of the so-called innovator’s dilemma. It also made some bad decisions about fabrication technologies, and it suffered from various personnel issues at the top.Some, however, will probably see Intel’s stumbles as a sign that the U.S. isn’t doing enough to back the semiconductor industry. That will intensify calls for the government to step in and support the ailing giant. Already, lawmakers are considering a $25 billion subsidy program for chip manufacturers, ostensibly to compete with China, which heavily underwrites its own companies. Intel, already one of the biggest recipients of government subsides, and whose chief executive officer has lobbied for the new bill, would undoubtedly reap a significant portion of the windfall.Indeed, there are some good reasons for the U.S. government to boost the chip industry. National defense is one. Computer chips are essential to modern warfare, and it’s too risky to let China have a stranglehold on high-level control circuitry. Taiwan is a de facto U.S. ally, but if it gets blockaded in a conflict with China, the U.S. could be cut off from TSMC’s factories and lose access to critical chip supplies at the worst possible moment.Industrial clustering is a second reason to want a domestic semiconductor industry. Chipmakers, like all high-tech companies, employ lots of skilled workers; having those workers in the U.S. creates a deep pool of talent and ideas that other companies located nearby can take advantage of, encouraging other tech industries to locate in the country as well.But there are more efficient ways to accomplish those goals than to throw money at one big, dominant company. Intel has been spending tens of billions of dollars on stock buybacks in recent years, halting only recently during the coronavirus pandemic. Buybacks, like dividends, are a way of returning cash to investors; basic corporate finance theory says that companies do this when they have more cash than they know how to invest productively. Thus, throwing government money at an existing champion such as Intel is likely to fatten shareholders’ pockets wallets rather than galvanize a wave of world-beating new investments.Instead, the government can pursue semiconductor dominance in more effective ways. The first is to encourage TSMC to put chip plants in the U.S., reducing the risk of Taiwan being isolated in a conflict. This already is beginning, and the Taiwanese chipmaker is planning a $12 billion facility in Arizona.Second, the U.S. can help encourage new chip manufacturers to get better at competing with Intel. An analogy is the auto industry, where the most cutting-edge innovation in recent years has come not from established -- and heavily subsidized -- giants such as Ford Motor Co. and General Motors, but from upstart innovator Tesla Inc., a beneficiary of tax breaks for clean-energy vehicles and which is now worth more than both older companies combined. In addition to encouraging innovation, new companies provide diversification, so that an industry doesn’t pin all its hopes in one or two big established players. And adding more companies fosters healthy competition as well.The U.S. needs more dynamic new companies of the Tesla variety. But as Andy Grove, one of Intel’s founders, warned in 2010, it can be difficult for smaller U.S. companies to scale up to compete with giant foreign rivals; it’s difficult for modern upstarts to do what Intel managed to do. Although capital is cheap on paper, the U.S. financial system isn’t set up to dish out the large sums of cheap money that young manufacturing companies need to scale up to Intel-like size; even Tesla has skirted the edge of bankruptcy multiple times. GlobalFoundries, a U.S. company whose business model is similar to that of TSMC, has been unable to bear the research and development costs necessary to stay at the leading edge.This could be addressed with a version of Grove’s suggestion for a government-led scaling bank, which would provide cheap financing for young companies to grow and reach the technological frontier. Instead of unconditional cash subsidies, these loans would be contingent on investment and growth. And they would be temporary in nature; whether a company succeeded in becoming a new high-tech giant, its access to the spigot of cheap financing would be finite. Industrial policy is sometimes necessary, but it’s a tricky thing to get right. By helping upstart high-tech manufacturing companies scale up, the U.S. might be able to support strategic industries while retaining the benefits of market competition.This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.For more articles like this, please visit us at bloomberg.com/opinionSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
Results: Akamai Technologies, Inc. Exceeded Expectations And The Consensus Has Updated Its Estimates
Chinese Nio, Tesla Electric Vehicle Competitor Li Auto Raises $1.1B In US IPO
Li Auto Inc. has raised $1.1 billion in its initial public offering in the United States, Bloomberg reported. What Happened The Chinese electric vehicles maker sold 95 million American depositary shares priced at $11.50 each on Wednesday -- above its previously indicated range of $8 to $10. The IPO values Li Auto at about $10 billion on these terms. The shares will begin trading Thursday under the symbol "LI" at the Nasdaq Stock Market.Goldman Sachs Group Inc (NYSE: GS), Morgan Stanley (NYSE: MS), UBS Group AG (NYSE: UBS), and China International Capital Corporation Limited (OTC: CNICF) are serving as the underwriters for the offering.Xiang Li, the CEO of the automaker will reportedly have 21% stake in the company at the conclusion of the IPO, with 72.7% of the total voting power.The listing is occurring simultaneously with a $380 million sale of shares to investors, including an affliate of the web-based shopping platform Meituan Dianping (OTC: MPNGY) and TikTok parent company ByteDance Ltd. Hillhouse Capital has also reportedly expressed interest in purchasing shares to the tune of $300 million at the IPO price.Why It Matters Li Auto sells SUVs priced between $21,000 and $70,000. It last reported a net loss of $10.89 million for the first quarter, with total revenue of $120.28 million. In the similar quarter last year, the company had posted a net loss of $344 million, an indication that its nearing profitability, Bloomberg noted.This month, another Chinese EV maker Nio Inc (NYSE: NIO), which held its IPO in September 2018, rallied to a record high and has run up nearly 216% year-till-date.A recent debutant on the markets, Nikola Corp (NASDAQ: NKLA) skyrocketed after its listing last month, and has clocked gains of 202% YTD. Elon Musk-led Tesla Inc (NASDAQ: TSLA) has surged 258% YTD.Photo by Jengtingchen via Wikimedia. See more from Benzinga * Apple Faces Fresh EU Antitrust Complaint Filed By Messaging App Telegram * Credit Suisse Reports Q2 Earnings Beat * Cryptocurrency Platform Diginex Aims Nasdaq Listing Through SPAC Merger By September(C) 2020 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.