Anheuser-Busch Companies, Inc. (BUD) will be acquired by Belgian brewer InBev (INB) for $52 billion, according to an agreement announced on 14 July 2008.
When we previously analyzed BUD's results for the first quarter of 2008, our Overall Gauge advanced to 39, of the 100 possible, points, up from 23 points at the end of 2007. In absolute sense, 39 points is a quite modest score, but it was the highest figure we had ever calculated for BUD. Our Growth and Profitability gauges signaled improvements after a long period of flat performance. It's true that pleasing EPS growth rates can be partially attributed to a substantial reduction in the number of diluted common shares.
Now, with the available data from the June 2008 quarter, our gauges display the following scores:
- Cash Management: 3 of 25 (unchanged from March)
- Growth: 5 of 25 (down from 15)
- Profitability: 10 of 25 (down from 15)
- Value: 0 of 25 (down from 8, reflects the acquisition-induced increase in the share price)
- Overall: 17 of 100 (down from 39)
Before we examine the factors that affected each gauge, we will compare the latest quarterly Income Statement to our previously announced expectations. Please note that the table format below, which we use for all analyses, can and often does differ in material respects from company-used formats. A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.
| ($M) | | June 2008 (actual) | June 2008 (estimated) | (actual) |
| Revenue | | 4721.4 | 4800 | 4515 |
| Op expenses | | | | |
| | CGS | (2998.4) | (3120) | (2858) |
| | SG&A | (793.2) | (816) | (756) |
| | Other | 0 | 0 | 0 |
| Operating Income | | 929.8 | 864 | 901 |
| Other income | | | | |
| | Equity income | 167.0 | 180 | 195 |
| | Interest, etc. | (113.4) | (125) | (104) |
| Pretax income | | 983.4 | 919 | 992 |
| Income tax | | (294.2) | (294) | (315) |
| Net Income | | 689.2 | 625 | 677 |
| | | $0.95/sh | $0.87/sh | $0.88/sh |
| Shares outstanding | | 727 | 715 | 765 |
We thought BUD would merely attain a Gross Margin of 35.0 percent for the quarter. The actual Margin was a much better 36.5 percent, since the Cost of Goods Sold was only 63.5 percent of Revenue. Management deserves credit for deftly handling increasing prices for agricultural commodities.
Sales, General, and Administrative (SG&A) expenses were 16.8 percent of Revenue, slightly better than our forecast of 17.0 percent.
Despite the modest Revenue growth, much lower-than-expected Costs of Goods Sold pushed Operating Income, as we define it, a laudable 7.6 percent above the forecast value.
Non-Operating incomes and expenses were consistent with our expectations. Equity Income declined as a consequence of higher materials and operating costs at Grupo Modelo. In addition, higher "retroactive" taxes in China didn't help.
The Income Tax Rate (not adjusted for Equity Income) was 29.9 percent, instead of the predicted 32.0 percent.
Net Income ended up 10.3 percent (9 percent for EPS) above our prediction.
Cash Management. This gauge didn't change from 3 points in March.
| June 2008 | 3 mos. ago | 12 mos. ago | |
| Current Ratio | 1.0 | 0.9 | 0.9 |
| LTD/Equity | 207% | 295% | 204% |
| Debt/CFO | 2.9 yrs | 2.9 yrs | 2.7 yrs |
| Inventory/CGS | 23.1 days | 26.9 days | 23.7 days |
| Finished Goods/Inventory | 42.1% | 36.1% | 40.6% |
| Days of Sales Outstanding (DSO) | 24.5 days | 21.0 days | 22.9 days |
| Working Capital/Market Capitalization | -0.2% | -0.6% | -0.4% |
| Cash Conversion Cycle Time | -1.9 days | 3.4 days | 0.3 days |
We had previously pointed out BUD's surging levels of debt, which seemed tied to increasing repurchases of the company's common stock. However, in the last three months, BUD has found a way to slash the debt ratio back to last year's level, without appreciably affecting Working Capital. While the total Inventory level is under control, but we find the growing percentage of Inventory made up of Finished Goods to be cause of concern.
Growth. This gauge decreased from 15 points in March to 5 points now.
| June 2008 | 3 mos. ago | 12 mos. ago | |
| Revenue growth | 6.6% | 7.0% | 4.0% |
| Revenue/Assets | 96.7% | 96.4% | 95.3% |
| CFO growth | 0.0% | 25.4% | 6.9% |
| Net Income growth | 4.9% | 6.3% | 9.0% |
Revenue and Net Income growth decelerated slightly, a disappointment after the first quarter. However, the big story is that Cash Flow from Operations, a metric we value highly, in the last four quarters was almost identical to CFO in the previous four quarters.
Profitability. This gauge decreased from 15 points in March to 10 points now.
| June 2008 | 3 mos. ago | 12 mos. ago | |
| Operating Expenses/Revenue | 82.8% | 82.8% | 83.0% |
| ROIC | 16.2% | 16.1% | 16.1% |
| FCF/Equity | 50.2% | 75.2% | 53.8% |
| Accrual Ratio | 0.7% | -1.3% | 0.0% |
The consistency in Operating Expenses and ROIC is remarkable given commodity prices. Our hopes for a rising ratio of Free Cash Flow to Equity were dashed.
Value. BUD shares soared over the course of the quarter from $47.45 to $62.12 and then kept on rising toward's InBev's $70 price. The Value gauge, based on the quarter-end price, fell to zero, compared to 8 points three months ago.
| June 2008 | 3 mos. ago | 12 mos. ago | |
| P/E | 21.3 | 16.2 | 19.7 |
| P/E to S&P 500 average P/E | 125% | 94% | 120% |
| Price/Revenue | 2.6 | 2.0 | 2.5 |
| Enterprise Value/Cash Flow (EV/CFO) | 18.2 | 13.4 | 16.2 |
The Overall gauge fell all the way back down to 17, of the 100 possible, points. A large part of the drop can be attributed to the surging stock price, but the decline in our Growth and Profitability gauges was unaffected by the pending acquisition.
InBev is making a monumental bet that they can exploit the synergies between their existing operations and those of Anheuser Busch. The numbers above suggest they are paying a substantial premium for this opportunity.
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