05 May 2007

BUD: Analysis through March 2007

Anheuser-Busch (BUD), the well-known brewer with expanding international operations, filed a 10-Q with the SEC for the quarter ending on 31 March 2007. We updated our analysis to address certain details (e.g., an inventory breakout) in this formal submittal that were not available in the original press release. Our results, adjusted to account for the new information, are reported in this post.

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

When we analyzed BUD after the quarter that ended in December 2006, the Overall score was a weak 23 points. Of the four individual gauges that fed into this composite result, Growth was the strongest at 15 points. Value was weakest at 1 point.

With the available data from the most recent quarter, our gauges now display the following scores:

Cash Management. This gauge dropped from 2 to 0 points. The Current Ratio is now 0.98. The normal range at BUD for this ratio is between 0.9 and 1.0, but it had dipped to 0.81 in December 2006. The recent recovery to the upper end of the range is welcome, but we would still prefer to see it higher. Long-Term Debt/Equity is a highly leveraged 217 percent, up from 194 percent the previous quarter. The debt ratio was 214 percent one year ago. Inventory/Cost of Goods Sold rose to 29 days from 25 days at the end of the prior quarter and 26 days at the end of March 2006. The percentage of Inventory that is product ready for sale is 36 percent, up from a Finished Goods ratio of just 29 percent three months earlier. The inventory level increases every first quarter, so the recent increase in absolute terms doesn't appear to be problematic. However, the more dramatic hike in the Finished Goods makes us wonder if sales were less than expected. Accounts Receivable equal 22 days of Revenue, which pretty much matches its five-year median value.

Growth. This gauge dropped 2 points from December's 15 points. Revenue growth is now 4 percent year over year, up from 1 percent a year ago. Net Income growth is an improving 9 percent, a big improvement compared to the year-earlier 18 percent. The increase wasn't a consequence of a change in the income tax rate, which has been around 32 percent. CFO declined by 2 percent, which might seem like an improvement if compared to last year's 9 percent decline in CFO. Revenue/Assets dropped back down to 93 percent, nullifying last quarter's gain in sales efficiency.

Profitability. This gauge maintained last quarter's 10 point score. ROIC was also unchanged at a moderate 16 percent. FCF/Equity edged up to 46 percent from last year's weak 42 percent. Operating Expenses/Revenue crawled up in the last year from 82 percent to 83 percent. The change was primarily due to a Gross Margin decline of 1 percent. The Accrual Ratio, which we like to be both negative and declining, didn't change from +1 percent. This tells us that the proportion of the company's Net Income due to Cash Flow, rather than changes in non-operational balance sheet accruals, is unchanged.

Value. BUD's stock price rose over the course of the quarter from $49.20 to $50.46. The Value gauge, based on the latter price, matched last quarter's feeble 1 point. It was 5 points twelve months ago. The P/E at the end of the quarter was 20, up a notch or two from recent quarters. The increase suggests the shares have become a little more expensive. BUD's P/E 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 23 percent premium to the average P/E, using core operating earnings, for stocks in the S&P 500. This is more than twice the company's normal 10 percent premium to the market. Companies tend to trade at a premium when their growth rates are greater than average, which hasn't been the case for BUD. The PEG ratio of 2.1 is indicative of an expensive stock. The Price/Revenue ratio, which is less affected by the one-time factors that cause wide swings in earnings, increased from about 2.2 to 2.5. The higher number suggests the shares have become more expensive. The average Price/Sales for the alcoholic beverages industry is 2.3.

Now at a disappointing 19 out of 100 possible points, the Overall gauge slipped from its long-time rut in the 20's. We don't see in the numbers why others have an optimistic view of the company's value. If there is a bullish case, it might rest on the increasing proportion of revenue from non-U.S. operations -- Rest of World (ROW).

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