17 March 2007

BUD: Financial Analysis through December 2006

For St Patrick's day, we'll discuss Anheuser-Busch (BUD), the well-known brewer and worldwide beer distributor. BUD also has an entertainment division that operates theme parks around the U.S.

It was big news in 2005 when Warren Buffett's Berkshire Hathaway (BRK-A) bought a large stake in BUD. We ran the numbers soon thereafter to determine if we could identify what led the Sage of Omaha to make this purchase. We couldn't: the numbers were lousy. Mr. Buffett later cut his stake, although his company still owns almost 5 percent of BUD. During this period, BUD has embarked on an ambitious expansion in China.

When we analyzed BUD after the quarter that ended in September 2006, the Overall score was a weak 21 points. [We bumped this up to 22 points when we factored in inventory data from the annual report; the effect of the inventory data was to increase the Cash Management score to 6 points.]

We have since updated the analysis to incorporate BUD's financial results, as reported in a Form 10-K, for the full year and last quarter of 2006. Our gauges now display the following scores:

Cash Management. This gauge dropped 4 points from 6 to 2. The Current Ratio is now 0.81, whereas it has more typically been between 0.9 and 1.0. We would prefer to see it higher. Long-Term Debt/Equity is a highly leveraged 194 percent, up from 170 percent the previous quarter. However, it is down from 217 percent a year ago and a five-year median value of 246 percent. Inventory/Cost of Goods Sold was steady at 25 days. The percentage of Inventory that is product ready for sale (i.e., Finished Goods) is 29 percent, which is up from 27 percent last year, but lower than the average level for the company. The inventory levels suggest sales met expectations. Accounts Receivable/Revenues equal 17 days. This is a couple days lower than the historic value, and it might indicate the company is finding it less difficult to get its customers to pay their bills.

Growth. This gauge increased a strong 8 points from September. Revenue growth was only 5 percent year over year, but up from a sickly 1 percent a year ago. Net Income growth was a modest 8 percent, but certainly better than the 19 percent decline in 2005's Net Income from the 2004 value. CFO, however, didn't grow in 2006, but this might seem like an improvement when compared to the 8 percent drop in CFO in 2005. Revenue/Assets is 96 percent, which is a fairly significant increase compared to last year's 91 percent. It indicates that the company is becoming more efficient at generating sales. A $750 million stock buyback, reducing assets, might also be a non-operational explanation for the increase.

Profitability. This gauge increased 1 point from the prior quarter. ROIC has been steady at a healthy 16 percent. FCF/Equity edged up to 48 percent from 46 percent last quarter and 43 percent a year ago. Operating Expenses/Revenue moved up in the last year from 82 percent to 83 percent. The change was primarily due to a 1 percent decline in Gross Margin. The Accrual Ratio, which we like to be both negative and declining, moved in the right direction, from 2 from 0 percent. This tells us that more of the company's Net Income is due to CFO, and, therefore, less is due to changes in balance sheet accruals.

Value. This gauge, based on the stock price of $49.20 at the year's end, dropped to a weak 1 point, compared to 3 and 5 points three and twelve months ago, respectively. The P/E at the end of the year was 19.4, up from 18.4 one year ago. The increase suggests the shares have become more expensive. BUD's P/E pretty much matches the average P/E for the alcoholic beverages industry. To remove the effect of overall market changes on the P/E, we note that the company's current P/E is at a 19 percent premium to the average P/E, using core operating earnings, for stocks in the S&P 500. Historically, the company's P/E has had premium to the market, as expressed by this measure, at or below 10 percent. Companies tend to trade at a premium when their growth rates are greater than average, particularly when the growth rates seem more likely to be sustained. The PEG ratio of 2.5 is indicative of an expensive stock. The Price/Revenue ratio, which isn't affected by the one-time factors that cause wide swings in earnings, has increased to 240 percent from 220 percent. The increase suggests the shares have become more expensive. The average Price/Sales for the industry is 222 percent.

Now at a disappointing 23 out of 100 possible points, the Overall gauge has been stuck in the 20's for the last several years. The stock price took a dip down to $40, before recovering to $50, where it had been for years. We were surprised by the recovery.

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