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Investment Thesis: Heineken could see further long-term upside from here on the basis of earnings growth, a healthy balance sheet and an attractive P/E ratio.
Heineken (OTCQX:HEINY) is one of the world’s leading beer and cider companies – with a presence in over 190 countries and ranking first in Europe and second globally.
The company has had to grapple with significant cost inflation as a result of rising prices. In spite of sales remaining resilient, we can see that the stock has taken a significant decline – largely erasing the gains made after the decline in early 2020.
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The purpose of this article is to assess whether Heineken could have scope to see a rebound in upside going forward.
Performance
When looking at the company’s 2022 half-year results, we can see that in spite of cost inflation – operating profit is up significantly on that of HY 2019 and HY 2021, and earnings per share (€) is up from €1.84 in HY 2019 to €2.30 in HY 2022.
Heineken Investor Presentation: August 2022
Additionally, from a longer-term standpoint, we can see that the company’s P/E ratio is near a 10-year low while EPS (normalized diluted) is at a 10-year high – indicating that the stock might be trading at good value from an earnings standpoint given the recent price decline.
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In terms of the company’s quick ratio (calculated as current assets less inventory all over current liabilities) – we can see that this ratio has seen an increase from 0.53 in June 2019 to 0.60 in June 2022. While the ratio remains below 1 – this does indicate that the company is conserving more liquid assets to fund its current liabilities.
| June 2019 | June 2022 | |
| Total current assets | 8818 | 11765 |
| Inventories | 2275 | 3143 |
| Total current liabilities | 12373 | 14319 |
| Quick ratio | 0.53 | 0.60 |
Source: Figures sourced from Heineken’s 2019 and 2022 half-year results. Figures (except quick ratio) provided in millions of euros. Quick ratio calculated by author.
Given the cost inflationary pressures that we have seen this year – an increase in the ratio is impressive.
Additionally, we can also see that non-current borrowings to total assets have decreased – indicating that the company has reduced its long-term debt.
| June 2019 | June 2022 | |
| Borrowings (non-current) | 14112 | 13026 |
| Total assets | 46227 | 52349 |
| Borrowings (non-current) to total assets | 0.31 | 0.25 |
Source: Source: Figures sourced from Heineken’s 2019 and 2022 half-year results. Figures (except quick ratio) provided in millions of euros. Borrowings (non-current) to total assets calculated by author.
Looking Forward
Going forward – inflation is likely to be on the mind of investors when considering Heineken’s prospects – both from the standpoint of cost inflation whereby it becomes more expensive for Heineken to produce its products, as well as a potential impact on demand whereby consumers reduce spending on Heineken products. The main risk for Heineken at this time with respect to inflation is that consumers start to choose cheaper brands in the face of price increases.
With that being said – the half-year results of 2022 do not show any particular evidence that demand has been adversely impacted by inflationary concerns. Moreover, the company’s balance sheet from a liquidity and long-term debt perspective appears to have strengthened since 2019.
In this regard, I take the view that investors may have overreacted to the potential impact of inflation on Heineken’s business and there could be scope for a rebound from here.
Conclusion
To conclude, Heineken has shown strong performance with respect to earnings growth and the company’s balance sheet seems to be healthy.
While some downside in the short to medium-term cannot be ruled out if inflation becomes more of a macroeconomic concern, I take the view that Heineken has shown significant resilience as a business, and I take the view that the stock could see further long-term upside from here.
