Heineken N.V.
Revenues per share have increased steadily but relatively modestly. Adjusted earnings per share have increased at a faster pace than revenues. The steady pace of growth reflects the nature of this consumer products company. It would decline in a recession but at the same time is not highly cyclical.
| Heineken N.V. (HEIA, Amsterdam, or 2 HEINY, U.S.) | |
| RESEARCH SUMMARY | |
| Report Author(s): | InvestorsFriend Inc. Analyst(s) |
| Author(s)’ disclosure of share ownership: | The Author(s) hold no shares |
| Based on financials from: | Dec ’18 + H1 ’19 |
| Last updated: | October 29, 2019 |
| Share Price At Date of Last Update: | Euros 90.90 |
| Currency: | Euros |
| Generic Rating (This rating does not consider the circumstances of any individual investor and is therefore not specific advice for any individual): | Weak Buy / Hold at 90.20 euros |
| Has Wonderful Economics? | Yes |
| Has Excellent and Trustworthy Management? | Yes |
| Likely to grow earnings per share at an attractive rate over the next decade? | Yes |
| Positive near-term earnings outlook? | modest |
| Valuation? | Fair but not compelling |
| SUMMARY AND RATING: The graph of revenues per share (red line) have grown steadily but relatively slowly averaging 3.4% in the past five years. Adjusted earnings per share have risen faster than revenues per share averaging 9.1%. The Value ratios indicate a very strong company which however appears to be at least fully valued. Management quality appears strong. The outlook is for continued growth but only mid single digit earnings per share growth 2019. Heineken has competitive advantages in terms of its established brands and scale. It does well on the criteria that Buffett looks for (other than valuation) and would be the type of company that Buffett favors. Overall we would rate this as a Weak Buy / Hold. We would take only a small position, if any, at this price. HEINEKEN also exposes Canadian and U.S. investors to currency risk (which can also be more positively called currency diversification). | |
| LONG TERM VALUE CREATION: Heineken has created very substantial value over the years and decades. | |
| DESCRIPTION OF BUSINESS: (figures based on 2018 annual report) Heineken, N.V. is a global beer (and cider) producer and has assets of 46 billion euros and annual sales of 22 billion euros. It has in total over 300 different brands . It focuses on premium brands that include Heineken, Amstel, Desperados, Sol, Tiger, Tecate, Red Stripe and Birra Morietti. The Americas are now its largest market with 36% of its beer volume, (Western) Europe is now second at 34% followed by Africa Middle East and Eastern Europe at 18% and Asia Pacific at 12%. As of 2018, there were 86,000 employees and it operated more than 170 breweries and other production plants globally. | |
| ECONOMICS OF THE BUSINESS: The economics of the company are excellent as indicated by the 17.5% ROE. Also its sales are relatively steady and not very cyclical. Its brand strength allows it not to no have to compete aggressively on price. | |
| RISKS: See annual report for a full discussion. Contamination of the product would be a significant risk. | |
| INSIDER TRADING / INSIDER HOLDING: We do not have this information for this European company. | |
| WARREN BUFFETT’s CRITERIA: Buffett indicates that all investments must pass four key tests: the business is simple to understand and predict (pass although global operations add to complexity), has favorable long-term economics due to cost advantages or superior brand power (pass due to established strong brands), apparently able and trustworthy management (pass), a sensible price – below its intrinsic value (marginal pass), Other criteria that have been attributed to Buffett include: a low debt ratio (pass), good recent profit history (pass) little chance of permanent loss of the investors capital (pass) a low level of maintenance type capital spending required to maintain existing operations excluding growth (pass) | |
| MOST RECENT EARNINGS AND SALES TREND: Adjusted earnings per share were down 1% in the first half of 2019 but grew by 8% in 2018, grew 7% in 2017 and grew only 3% in 2016. Revenues per share grew about 5% in the first half of 2019, and grew 4.0% in 2018, declined 0.2% in 2017 and rose 1.1% in 2016. The recent earnings trend and sales trend is therefore modest. | |
| COMPARABLE STORE SALES OR INDUSTRY SPECIFIC STATISTICS: Not applicable | |
| Earnings Growth Scenario and Justifiable P/E: The recent adjusted P/E of 21.6 could be justified if the earnings grow at 6% per year for ten years and the shares can then be sold at a similar P/E of about 20. | |
| VALUE RATIOS: Analysed at €90.90 Euros per share. The price to book value is somewhat unattractive, in isolation at 3.42. This reflects the fact that the company is valued for its brand power not for its hard assets. But note that the book value itself includes substantial purchased goodwill. The dividend yield at 1.8% is modest and reflects a payout of 39% of earnings. The adjusted earnings P/E ratio is somewhat unattractively high at 21.6. The return on equity is very good at 17.5%. We calculate an intrinsic value of €65 euros per share if adjusted earnings grow at 5% per year for five years and the P/E declines to 17 or €84 if the P/E declines only to 20. And €96 euros per share if adjusted earnings grow at 8% per year for five years and the P/E declines only slightly to 20. Overall the value ratios indicate a very strong company but which is probably at least fully valued at this time based on conservative assumptions. This would indicate a rating of perhaps Weak Buy / Hold at best. | |
| SUPPORTING RESEARCH AND ANALYSIS | |
| Symbol and Exchange: | HEIA, Amsterdam, or 2 HEINY, U.S. |
| Currency: | Euros |
| Contact: | investors@heineken.com |
| Web-site: | www.theheinekencompany.com |
| INCOME AND PRICE / EARNINGS RATIO ANALYSIS | |
| Latest four quarters annual sales $ millions: | $23,140.0 |
| Latest four quarters annual earnings $ millions: | $1,903.0 |
| P/E ratio based on latest four quarters earnings: | 27.3 |
| Latest four quarters annual earnings, adjusted, $ millions: | $2,402.0 |
| BASIS OR SOURCE OF ADJUSTED EARNINGS: We used management’s figure for net earnings before exceptional items and amortization of acquisition-related intangibles | |
| Quality of Earnings Measurement and Persistence: The earnings and adjusted earnings appear to be conservatively stated and exhibit good persistence. | |
| P/E ratio based on latest four quarters earnings, adjusted | 21.6 |
| Latest fiscal year annual earnings: | $1,903.0 |
| P/E ratio based on latest fiscal year earnings: | 27.3 |
| Fiscal earnings adjusted: | $2,424.0 |
| P/E ratio for fiscal earnings adjusted: | 21.4 |
| Latest four quarters profit as percent of sales | 10.4% |
| Dividend Yield: | 1.8% |
| Price / Sales Ratio | 2.25 |
| BALANCE SHEET ITEMS | |
| Price to (diluted) book value ratio: | 3.42 |
| Balance Sheet: (Based on 2018 annual report) 37% of the assets consist of intangible purchased goodwill, brand values and customer relations. Property and equipment represents 28% of assets, 15% is current assets other than cash being largely receivables and inventories, 4% is cash, 11% of assets are investments in joint ventures and 2% are other investments and receivables as well as deferred taxes. These assets are funded 33% by common equity, 39% by debt 19% by current liabilities (other than debt) being largely trade payables, 3% by deferred tax liabilities, 2% by non-controlling interests, 2% by long-term employee benefit liabilities and 2% for rounding and other provisions. This is a relatively strong balance sheet. | |
| Quality of Net Assets (Book Equity Value) Measurement: This is not really relevant with the shares trading at 3.4 times book value. | |
| Number of Diluted common shares in millions: | 572.2 |
| Controlling Shareholder: The parent company, Heineken Holdings N.V. controls over 50% of the shares. | |
| Market Equity Capitalization (Value) $ millions: | $52,013.0 |
| Percentage of assets supported by common equity: (remainder is debt or other liabilities) | 32.9% |
| Interest-bearing debt as a percentage of common equity | 117% |
| Current assets / current liabilities: | 0.7 |
| Liquidity and capital structure: Appears to be strong. | |
| RETURN ON EQUITY AND ON MARKET VALUE | |
| Latest four quarters adjusted (if applicable) net income return on average equity: | 17.5% |
| Latest fiscal year adjusted (if applicable) net income return on average equity: | 17.5% |
| Adjusted (if applicable) latest four quarters return on market capitalization: | 4.6% |
| GROWTH RATIOS, OUTLOOK and CALCULATED INTRINSIC VALUE PER SHARE | |
| 5 years compounded growth in sales/share | 3.4% |
| Volatility of sales growth per share: | steady |
| 5 Years compounded growth in earnings/share | 7.1% |
| 5 years compounded growth in adjusted earnings per share | 9.1% |
| Volatility of earnings growth: | steady |
| Projected current year earnings $millions: | not available |
| Management projected price to earnings ratio: | not available |
| Over the last ten years, has this been a truly excellent company exhibiting strong and steady growth in revenues per share and in earnings per share? | Yes |
| Expected growth in EPS based on adjusted fiscal Return on equity times percent of earnings retained: | 10.6% |
| More conservative estimate of compounded growth in earnings per share over the forecast period: | 5.0% |
| More optimistic estimate of compounded growth in earnings per share over the forecast period: | 8.0% |
| OUTLOOK FOR BUSINESS: Heineken believes there are opportunities to create value through acquisitions and investments in new markets. The company forecasts profit growth in 2019 of only mid-single digits (for example 5%). | |
| LONG TERM PREDICTABILITY: It seems safe to assume that Heineken can continue to grow its profits over the years. | |
| Estimated present value per share: We calculate €65 if adjusted earnings per share grow for 5 years at the more conservative rate of 5% and the shares can then be sold at a reduced P/E of 17 and €97 if adjusted earnings per share grow at the more optimistic rate of 8% for 5 years and the shares can then be sold at a slightly reduced P/E of 20. And €84 with 5% growth and a terminal P/E of 20. All estimates use a 7.0% required rate of return. | |
| ADDITIONAL COMMENTS | |
| INDUSTRY ATTRACTIVENESS: (These comments reflect the industry and the company’s particular incumbent position within that industry segment.) Michael Porter of Harvard argues that an attractive industry is one where firms are somewhat protected from competition based on the following four tests. Barriers to entry (pass. brand value and scale provide significant barriers to new entrants). No issues with powerful suppliers (pass). No issues with dependence on powerful customers (pass), No potential for substitute products (pass) No tendency to compete ruinously on price (marginal pass). Overall this industry appears to be attractive for an established incumbent. | |
| COMPETITIVE ADVANTAGE: The company indicates that Heineken is the world’s most valuable PREMIUM beer brand. The company’s advantage lies in in the power of its brands. | |
| COMPETITIVE POSITION: We do not have information oi market share but we understand that Heineken has a strong market share in many of its markets. | |
| RECENT EVENTS: Heineken has extensive operations and brands around the world and continues to make acquisitions. It recently signed a partnership with the largest beer company in China as part of its growth strategy. | |
| ACCOUNTING AND DISCLOSURE ISSUES: We have not identified any major concerns regarding the accounting. There has however been some restatements of prior year earnings driven by accounting changes. | |
| COMMON SHARE STRUCTURE USED: Normal, one vote per share. | |
| MANAGEMENT QUALITY: Management appears to be strong. | |
| Capital Allocation Skills: Based on the recent 17.5% ROE level past acquisitions appear to have been a very good use of capital. | |
| EXECUTIVE COMPENSATION: Compensation is generous but is not a concern given the size of the company. | |
| BOARD OF DIRECTORS: Warren Buffett has suggested that ideal Board members be owner-oriented, business-savvy, interested and financially independent. Heineken has a 10 member Board. We have no opinion on the quality of this Board at this time. | |
| Basis and Limitations of Analysis: The following applies to all the companies rated. Conclusions are based largely on achieved earnings, balance sheet strength, achieved earnings per share growth trend and industry attractiveness. We undertake a relatively detailed analysis of the published financial statements including growth per share trends and our general view of the industry attractiveness and the company’s growth prospects. Despite this diligence our analysis is subject to limitations including the following examples. We have not met with management or discussed the long term earnings growth prospects with management. We have not reviewed all press releases. We typically have no special expertise or knowledge of the industry. | |
| DISCLAIMER: All stock ratings presented are “generic” in nature and do not take into account the unique circumstances and risk tolerance and risk capacity of any individual. The information presented is not a recommendation for any individual to buy or sell any security. The authors are not registered investment advisors and the information presented is not to be considered investment advice to any individual. The reader should consult a registered investment advisor or registered dealer prior to making any investment decision. For ease of writing style the newsletter and articles are often written in the first person. But, legally speaking, all information and opinions are provided by InvestorsFriend Inc. and not by the authors as individuals. The author(s) of this report may have a position, as disclosed in each report. The authors’ positions may subsequently change without notice. | |
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