21 July 2007

BUD: Looking forward to 2Q results

Anheuser-Busch (BUD) will report second quarter earnings on 25 July. Our calculations after the first quarter resulted in gauge scores that fell below the previous levels that were already weak. We saw high debt, growing inventory, tepid revenue growth, declining cash flow, and valuation measures more typical of a faster growing company. And, yet, there is speculation the company is a possible takeover target. Our only explanation for the bullish view held by others is the increasing proportion of revenue from non-U.S. operations -- Rest of World (ROW).

After the first quarter, the company provided financial guidance for the remainder of 2007. One worrisome item was the expectation that revenue per barrel of beer would increase by less than the cost of producing each barrel. This suggests that Gross Margin will remain under pressure. On the other hand, there was the good news that Equity Income would increase by more than 20 percent.

More recently, the company announced that it "is on track to meet its 2007 earnings-per-share growth target of 7 percent to 10 percent, but ... second-quarter profit would come in below Wall Street's current projections."

Revenue projections were not included in either of these announcements. Year-over-year Revenue growth has recently been about 4 percent, after a year or so of much weaker growth. Given the aforementioned guidance, we're going to look for second quarter Revenue of $4.52 billion. This figure is 6 percent greater than the Revenue in the comparable year-earlier quarter, and it translates into year-over-year Revenue growth of 4 percent.

We're assuming the Gross Margin will be about 36 percent of Revenue because of the company's guidance. Thus, the Cost of Goods Sold (CGS) should be about 64 percent of $4.52 billion, or $2.9 billion.

Sales, General, and Administrative (SG&A) expenses have been around 17.5 percent of Revenue, which would work out to be $790 million in the second quarter. This could prove to be an underestimate, since the company indicated that marketing costs would be stepped up.

These figures would result in Operating Income of $836 million in the quarter.

Given the optimistic guidance about Equity Income, we expect this value to be a little over $200 million. If we assume a Net Interest expense of $110 million, pre-tax income will be $930 million. (Strictly speaking, the equity income shouldn't be included in this figure since it is net-of-tax.)

With normal Income Tax Rates applying, we can assume $288 million in income tax. This would leave us with Net Income of $642 million ($0.83 per share).

4518 4256
Op expenses

CGS (2892) (2601)

SG&A (791) (714)

Other 0 0
Operating Income
836 881
Other income

Equity income 204 170

Interest, etc. (110) (-117)
Pretax income
930 935
Income tax
(288) (297)
Net Income
642 638

0.83/sh 0.82/sh

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