BUD: Financial Analysis through September 2007

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

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. In the U.S., the nation's second and third-largest brewers, Miller and Coors, are teaming up to compete against BUD.

Nevertheless, BUD announced last July that "it was on track for earnings to accelerate in the second half of the year, and maintained that 2007 earnings growth would be higher than its long-term target of 7 percent to 10 percent." A similar statement was made in early September, with the added tidbit that sales are accelerating.

Berkshire Hathaway (BRK-A) owned almost 36 million BUD shares as of 31 December 2006.

When we analyzed BUD after the June quarter, the Overall score was 23 points. Of the four individual gauges that fed into this composite result, Growth and Profitability were strongest at 12 points each. Value was weakest at 0 points.

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

• Cash Management: 3 of 25
• Growth: 13 of 25
• Profitability: 12 of 25
• Value: 2 of 25

• Overall: 25 of 100

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

($M)		Sept 2007 (actual)	Sept 2007 (predicted)	Sept 2006 (actual)
Revenue		4617.7	4632	4281
Op expenses
	CGS	(2868.5)	(2918)	(2645)
	SG&A	(777.4)	(787)	(738)
	Other	26.5	0	0
Operating Income		998.3	926	898
Other income
	Equity income	185.2	188	157
	Interest, etc.	(126.8)	(110)	(105)
Pretax income		1056.7	1004	949
Income tax		(350.0)	(311)	(312)
Net Income		706.7	693	638
		0.95/sh	0.91/sh	0.82/sh

BUD's Revenue in the September 2007 quarter was 7.9 percent greater than in the year-earlier quarter; our estimate for revenue growth was 8.2 percent. In addition, we thought the Cost of Goods Sold (CGS) would be 63 percent of Revenue, and the actual value was 62.1 percent. Sales, General, and Administrative (SG&A) expenses were 16.8 percent of Revenue, compared to our forecast of 17 percent.

The lower costs, coupled with an unexpected $26.5 million gain on the sale of distribution rights, resulted in Operating Income 7.8 percent above the forecast value.

Non-operating income was $19.6 million below our estimate. The Income Tax Rate (not adjusted for equity income) was 33 percent, instead of the predicted 31 percent. As a result, Net Income exceeded our prediction by only 2 percent. Without the special gain mentioned above, the BUD's net income in the quarter would have fallen below our prediction.

Cash Management. This gauge decreased from 4 points in June to 3 points now.

The measures that helped the gauge were:

• Cash Conversion Cycle Time (CCCT) = -3.0 days, down from -1.3 days one year ago, for this measure of efficiency.
• Inventory/CGS = 22.7 days, compared to 23.7 and 24.4 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 = 235.9%; highly leveraged and becoming more so
• Debt/CFO = 2.9 years, compared to 2.7 years 3 and 12 months ago
  
• Days of Sales Outstanding (DSO) = 21.7 days, up from 20 days one year earlier
• Working Capital/Market Capitalization = -0.5 percent, about the same as -0.7 percent one year earlier

Growth. This gauge increased from 12 points in June to 13 points now.

• Revenue/Assets = 97.0 percent year-over-year, up from 92.8 percent; sales efficiency is improving
• Revenue growth = 4.8 percent year-over-year, up from 4.1 percent
• Net Income growth = 5.9 percent year-over-year, up from 1.0 percent
• CFO growth = 5.6 percent year-over-year, up from 3.2 percent

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

Profitability. This gauge didn't change from 12 points in June.

The measures that helped the gauge were:

• FCF/Equity = 57.8 percent, up from 45.6 percent in a year (excellent)
• ROIC = 16.5 percent, up from 16.3 percent in a year.

The measures that hurt the gauge were:

• Accrual Ratio = +0.3 percent, down from 0.0 percent in a year
• Operating Expenses/Revenue = 82.9 percent, up from 82.2 percent in a year.

Value. BUD's stock price dropped over the course of the quarter from $52.16 to $49.99. The Value gauge, based on the latter price, increased to a still-weak 2 points, compared to 0 points three months ago (and 4 points twelve months ago).

• Enterprise Value/Cash Flow = 15.8, down slightly from 15.9 in September 2006
• P/E = 18.3, down slightly from 18.7 one year ago
  
• P/E to S&P 500 average P/E = 11 percent premium, matching its five-year median
  
• Price/Revenue ratio = 2.3, a little lower than its five-year median of 2.6.

The average P/E for the Alcoholic Beverages industry is 20.5. The average Price/Revenue for the industry is currently 2.2.

Now at 25 out of 100 possible points, the Overall gauge remains weak. We give BUD credit for making good progress reducing operating costs, but the quarter appears better than it might otherwise have because of a large one-time gain. The growth and profitability scores are decent, but we don't see why this company trades at a premium to the market multiple with below average Net Income and Cash Flow growth.