BUD: Look Ahead to December 2007 Results

Our Overall Gauge score for Anheuser-Busch (BUD) was 27 out of 100 possible points after we analyzed the company's third quarter results. The analysis noted good progress reducing operating costs, but it also noted that earnings were pumped up by a one-time gain on the sale of distribution rights. The Value gauge remained weak at 3 out of 25 points because it appeared that BUD shares were trading at a premium not justified by corporate results.

While the Growth and Profitability scores were decent, the double-weighted Value gauge dragged down the Overall score. It also didn't help that the Finished Goods/Inventory ratio rose to 39.4 percent from only 28.6 percent one year earlier. There might be an operational explanation for the increase, but we tend to worry that unusual growth in the Finished Goods ratio could be signaling that sales were below expectations.

More optimistically, W. Randolph Baker, BUD's vice president and chief financial officer, told investors that Anheuser-Busch is clearly "better positioned for long-term growth." He attributed these good tidings to a transformation in their "selling system," as well as "changes in marketing and media." In addition, BUD is seeing "acceleration of growth in the consumer demand for beer" in the U.S. Mr. Baker reaffirmed the company's expectation for earnings per share growth for the full year 2007 to exceed its 7 to 10 percent long-term objective. [We need to determine how much of this growth is due to fewer shares outstanding after stock repurchases, which have been significant. As we noted previously, the average diluted number of common shares dropped from 775.9 million in the third quarter of 2006 to 745.4 million in the third quarter of 2007.]

BUD doesn't provide explicit Revenue guidance. Given the company's rosy statements, which included mention of phased-in price increases, we're expecting to see Revenue grow at an accelerating pace. However, BUD's Revenue tends to be less in the fourth quarter (between 22 and 23 percent of annual revenues) than the others. Instead of focusing on sequential quarterly growth, we will turn our attention to year-over-year growth. To be specific, we will look for annual revenue in 2007 to be 6 percent more than 2006's revenue, which was 4.5 percent greater than revenue in 2005. Revenue in the current quarter of $3.67 billion would accomplish this goal. It would be 7.1 percent more than in the year-earlier quarter.

With revenue in the fourth quarter typically weak, expenses as percentage of revenue tend to be a little higher than in the other quarters. Cost of Goods Sold (CGS), which are averaging 63 to 65 percent of revenue -- for a Gross Margin of 35 to 37 percent -- will probably be closer to 69 percent in the fourth quarter. Our CGS estimate is 0.69 * $3.67 billion = $2.53 billion.

Sales, General, and Administrative (SG&A) expenses have been around 17 percent of Revenue, but tend to be several points higher in the fourth quarter. If we assume 21 percent, SG&A expenses would work out to be $770 million in the fourth quarter.

These figures would result in Operating Income of $369 million in the quarter.

We're estimating Equity Income to be $167 million. This is 20 percent above the value in 2006's fourth quarter.

If we assume a Net Interest expense of $120 million, pre-tax income will be $414 million. (Strictly speaking, the Equity Income shouldn't be included in this figure since it is net-of-tax.)

Assuming an Income Tax Rate of 32 percent, the tax in the quarter should be about $133 million. This would leave us with Net Income of $282 million ($0.38 per share), compared to $190.7 million ($0.25/share)

($M)		Dec 2007 (predicted)	Dec 2006 (actual)
Revenue		3669	3425
Op expenses
	CGS	(2531)	(2442)
	SG&A	(770)	(764)
	Other	0	0
Operating Income		367	219
Other income
	Equity income	167	140
	Interest, etc.	(120)	(114)
Pretax income		414	244
Income tax		(133)	(54)
Net Income		282	191
		0.38/sh	0.25/sh