BUD management has been optimistic about sales and profitability in 2008. The latest results give investors an initial opportunity to judge whether the confidence is warranted. Management's long-term earnings growth objective is annual EPS increases between 7 and 10 percent. The per-share part of this goal allows share repurchases to contribute to its attainment.
Anheuser-Busch Companies, Inc. (BUD) is the nation's top brewer. It is facing increased competition from today's second and third-largest brewers in the U.S., SABMiller and MolsonCoors, which have agreed to combine their U.S. businesses. BUD, which is looking to expand its international operations, has bought China's Harbin Brewery. It has long held a stake in Tsingtao. There have also been rumors of merger between BUD and the giant Belgian brewer InBev (INB), with whom it already has a product distribution agreement.
When we analyzed BUD after 2007's fourth-quarter and full-year results results became available, the Overall score was a disappointing 22 of 100 possible points. Of the four individual gauges that fed into this composite result, Profitability was strongest at 11 points. Value was weakest at 1 point.
Now, with the available data from the March 2008 quarter, our gauges display the following scores:
- Cash Management: 8 of 25
- Growth: 15 of 25
- Profitability: 15 of 25
- Value: 7 of 25
- Overall: 43 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) | | March 2008 (actual) | March 2008 (estimated) | (actual) |
| Revenue | | 4099 | 4100 | 3858 |
| Op expenses | | | | |
| | CGS | (2630) | (2686) | (2475) |
| | SG&A | (706) | (730) | (666) |
| | Other | 0 | 0 | 0 |
| Operating Income | | 763 | 685 | 718 |
| Other income | | | | |
| | Equity income | 126 | 150 | 159 |
| | Interest, etc. | (128) | (115) | (123) |
| Pretax income | | 761 | 720 | 756 |
| Income tax | | (250) | (226) | (238) |
| Net Income | | 511 | 494 | 518 |
| | | $0.71/sh | $0.67/sh | $0.67/sh |
| Shares outstanding | | 722 | 737 | 773 |
BUD's Revenue in the March 2008 quarter almost exactly matched our estimate. Revenue was 6.2 percent greater than in the year-earlier quarter, and year-over-year Revenue growth was 7.0 percent.
We thought the Cost of Goods Sold would be 65.5 percent of Revenue, and the actual value was 64.2 percent. The Gross Margin for the quarter was, therefore, 35.8 percent. Management takes credit for reducing costs in the face of "industry-wide cost pressures," which we presume is a reference to the increasing prices for agricultural commodities. The situation was also positive for Sales, General, and Administrative (SG&A) expenses, which were 17.2 percent of Revenue -- a little below our forecast of 17.8 percent.
Lower-than-expected operating expenses caused Operating Income, as we define it, to surge 11.4 percent above the forecast value.
Non-Operating incomes and expenses were less favorable than our expectations. Equity Income was a substantial $24 million below our estimate; the company attributed the decline to a combination of higher materials and operating costs at Grupo Modelo. In addition, the Net Interest Expense was $13 million more than anticipated. The Income Tax Rate (not adjusted for Equity Income) was 32.8 percent, instead of the predicted 31.4 percent.
The Non-Operating figures brought Net Income down to 3.4 percent above our prediction. However, BUD repurchased more shares than we anticipated, which resulted in EPS 6 percent above our estimate and 6 percent above the equivalent value in the March 2007 quarter.
Cash Management. This gauge increased from 3 points in December to 8 points now.
| March 2008 | 3 mos. ago | 12 mos. ago | |
| Current Ratio | 0.9 | 0.9 | 1.0 |
| LTD/Equity | 295% | 290% | 217% |
| Debt/CFO | 2.9 yrs | 3.2 yrs | 3.3 yrs |
| Inventory/CGS | 26.9 days | 23.9 days | 27.0 days |
| Finished Goods/Inventory | N/A | 34.3% | 35.5% |
| Days of Sales Outstanding (DSO) | 21.0 days | 16.7 days | 21.0 days |
| Working Capital/Market Capitalization | -0.6% | -0.6% | -0.1% |
| Cash Conversion Cycle Time | 3.4 days | -8.0 days | 4.6 days |
While we're not a big fan of BUD's high debt level, we're encouraged that CFO grew at faster rate. This makes the debt more affordable by at least one measure. Inventory seems to be under control, but we will be able to make a more complete assessment when the inventory composition data is published in the 10-Q report.
Growth. This gauge increased from 9 points in December to 15 points now.
| March 2008 | 3 mos. ago | 12 mos. ago | |
| Revenue growth | 7.0% | 6.2% | 3.9% |
| Revenue/Assets | 96.4% | 97.3% | 93.3% |
| CFO growth | 25.4% | 8.5% | -1.5% |
| Net Income growth | 6.3% | 7.6% | 9.5% |
The turnaround in Cash Flow growth is particularly welcome. The Net Income growth rate, which is not on a per-share basis, is rather tepid.
Profitability. This gauge increased from 11 points in December to 15 points now.
| March 2008 | 3 mos. ago | 12 mos. ago | |
| Operating Expenses/Revenue | 82.8% | 82.8% | 82.8% |
| ROIC | 16.1% | 16.2% | 15.6% |
| FCF/Equity | 75.2% | 65.7% | 46.4% |
| Accrual Ratio | -1.3% | 0.9% | 2.3% |
The consistency in Operating Expenses is remarkable given commodity prices. Even more impressive is the ratio of Free Cash Flow to Equity, which shows the kinds of returns a leveraged capital structure can deliver. The lower Accrual Ratio signals higher-quality earnings.
Value. BUD shares dropped over the course of the quarter from $52.34 to $47.45. The Value gauge, based on the quarter-end price, increased to 7 points, compared to 2 points three months ago (and 1 point twelve months ago).
| March 2008 | 3 mos. ago | 12 mos. ago | |
| P/E | 16.2 | 18.2 | 19.7 |
| P/E to S&P 500 average P/E | 98.3% | 103% | 124% |
| Price/Revenue | 2.0 | 2.3 | 2.5 |
| Enterprise Value/Cash Flow (EV/CFO) | 13.4 | 16.2 | 18.3 |
The Overall gauge jumped up 20 points to 43 out of 100 possible points. This might not be a great score, but it is the highest we've ever calculated for BUD. Growth and Profitability have improved significantly, yet the share price has fallen. As a result, the shares appear much more affordable by our measures. It's true that pleasing EPS growth rates can be partially attributed to the 6.6 percent reduction in the number of diluted common shares over the last 12 months.
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