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Will Anheuser-Busch InBev’s Margins Continue to Improve in 2Q15?

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Improvement in margins

Anheuser-Busch InBev (BUD) (ABI.BR) reported improved margins in 1Q15, backed by its revenue management strategies and cost control. The company’s gross margin improved to 59.8% from 59.6% in the comparable quarter of the previous year. The improvement came despite a fall in 1Q15 revenue.

The company has consistently improved its gross margin in each of the past five fiscal years.

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Operating margin

Anheuser-Busch InBev’s operating margin improved to 30.8% in 1Q15 from 29.5% in the first quarter of the previous year. Margins for its Mexico, Brazil, and China businesses showed considerable improvement. A focus on premium beer brands has also recently resulted in margin expansion.

The company is efficient in deriving huge synergies from strategic business combinations. It’s on track to generate $1 billion in cost synergies by 2016 from the Grupo Modelo combination. In 1Q15, the company’s Mexico business realized cost synergies of $10 million. Anheuser-Busch InBev expects higher cost synergies in the second half of 2015.

Better than peers

Anheuser-Busch InBev’s margins are higher than its peer group. A lean operating structure and dominance in the US beer business are key reasons for higher margins. In fiscal 2014, the company’s operating margin came in at 32.5%. Operating margin of Constellation Brands (STZ) and Molson Coors Brewing (TAP) were 24.9% and 17.5%, respectively, in the comparable fiscal year.

Anheuser-Busch InBev’s large scale of operations, pricing power, presence in attractive markets, and initiatives to drive its volumes will likely help the company maintain higher margins than its competitors.

Constellation Brands and Molson Coors Brewing together account for ~2.5% and 0.2% of the portfolio holdings of the Consumer Staples Select Sector SPDR ETF (XLP) and the SPDR S&P 500 ETF (SPY), respectively.

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