BUD: Financial Analysis through June 2007

We have analyzed Anheuser-Busch's (BUD) preliminary financial results for the quarter that ended on 30 June 2007. Our evaluation will be updated after the company formally submits a complete 10-Q report to the SEC.

Company Description

BUD is the well-known brewer and, yes, theme park operator. The company is making a determined effort to expand its "Rest of World (ROW)" non-U.S. operations, most notably including China. Some say that BUD might buy Belgian brewer InBev (INB) as part of this strategy.

If not the acquirer, there has been speculation that BUD could be the target. A buyout would probably please Warren Buffett, whose Berkshire Hathaway (BRK-A) owned almost 36 million BUD shares as of 31 December 2006.


Previous Results

When we analyzed BUD after the March quarter, the Overall score was a mere 24 points. Of the four individual gauges that fed into this composite result, Growth was the strongest at 13 points. Value was weakest at 1 point. [Note that recent algorithm tweaks led to minor changes in the previously reported scores.]


New Scores

Now, with the available data from the June 2007 quarter, our gauges display the following scores:

• Cash Management: 4 of 25
• Growth: 12 of 25
• Profitability: 12 of 25
• Value: 0 of 25
  

• Overall: 23 of 100
  

Income vs. Expectations

Before we examine the factors that affected each gauge, let's compare the latest quarterly Income Statement to our previously announced expectations.

($M)		June 2007 (actual)	June 2007 (predicted)	June 2006 (actual)
Revenue		4515	4518	4256
Op expenses
	CGS	(2858)	(2892)	(2601)
	SG&A	(756)	(791)	(714)
	Other	0	0	0
Operating Income		901	836	881
Other income
	Equity income	195	204	170
	Interest, etc.	(104)	(110)	(117)
Pretax income		992	930	935
Income tax		(315)	(288)	(297)
Net Income		677	642	638
		0.88/share	0.83/sh	0.82/sh

Revenue was spot-on our estimate, at about 6 percent greater than in the year-earlier quarter. In addition, we thought the Cost of Goods Sold (CGS) would be 64 percent of Revenue, and the actual value was 63.3 percent. Sales, General, and Administrative (SG&A) expenses were 16.7 percent of Revenue, compared to our forecast of 17.5 percent.

Lower SG&A expenses resulted in Operating Income 7.8 percent above the forecast value.

Non-operating income was a minuscule $3 million below our estimate. The Income Tax Rate was 31.8 percent, instead of the predicted 31 percent. As a result, Net Income exceeded our prediction by 5.5 percent. The lower SG&A expenses explain most of the out-performance.


Gauge Review

Cash Management. This gauge was unchanged from March at 4 points.

The measures that helped the gauge were:

• Cash Conversion Cycle Time (CCCT) = 0.3 days, down from 3.5 days, for this measure of efficiency
• Debt/CFO = 2.7 years, compared to 3.3 and 2.9 years 3 and 12 months ago, respectively
  
• Inventory/CGS = 24 days, compared to 27 and 25 days 3 and 12 months ago, respectively
  

The measures that hurt the gauge were:

• Current Ratio =0.9; weaker than we like, but matching the 5-year median value
• LTD/Equity = 204%; highly leveraged, but down 1% from a year ago
• Days of Sales Outstanding (DSO) = 23 days, about the same as one year earlier
• Working Capital/Market Capitalization = -0.4 percent, about the same as one year earlier.
  

Growth. This gauge decreased from 13 in March to 12 points.

• Revenue growth = 4 percent, up from 3 percent in a year
• Revenue/Assets = 95.3 percent, up from 92.2 percent in a year; sales efficiency is improving
• Net Income growth = 9 percent, up from -12.6 percent in a year

• CFO growth = 7 percent, up from 1.4 percent in a year

Net income benefited a little from a change in the income tax rate from 32 to 31 percent

Profitability. This gauge remained at March's 12 points.

The measures that helped the gauge were:

• FCF/Equity = 54 percent, up from 49 percent in a year
• ROIC = 16.1 percent, equating last year's value
  

The measures that hurt the gauge were:

• Accrual Ratio = -0.5 percent, down from 0.0 percent in a year
  
• Operating Expenses/Revenue = 83 percent, up from 82.2 percent in a year
  

Value. BUD's stock price rose over the course of the quarter from $50.46 to $52.16. The Value gauge, based on the latter price, dropped to 0 points, compared to 1 point three months ago (and 5 points twelve months ago).

The measures that helped the gauge were:

• Enterprise Value/Cash Flow = 16.2, up from 15.7 in June 2006
• P/E = 19.7, up from 19
  
• P/E to S&P 500 average P/E = 18.5 percent premium, higher than its five-year median of 10 percent premium
  
• Price/Revenue ratio = 2.5, a little higher than its five-year median of 2.4
  

The average P/E for the Alcoholic Beverages industry is 20. The average Price/Revenue for the industry is currently 2.25.

Now at 23 out of 100 possible points, the Overall gauge is low and getting lower. The growth and profitability scores are encouraging, but we don't see why this company trades at a premium to the market multiple.