01 February 2008

BUD: Financial Analysis through December 2007

We have analyzed Anheuser-Busch's (BUD) preliminary financial results for the quarter that ended on 31 December 2007. Our evaluation will be updated after the company formally submits a 10-Q report to the SEC.

There was reason for optimism. In announcing the second quarter results, BUD's President and CEO said last July that "the company is on track to deliver accelerating earnings growth in the second half of the year" and that he "expect[s] the company’s 2007 earnings per share increase to exceed this [7 to 10 percent] range." A similar statement was made in October in conjunction with the third quarter results.

BUD announced on 7 January that the number of barrels shipped by the company to wholesalers increased in 2007 by 2 percent over the number shipped in 2006.

BUD is looking to grow by expanding its operations in the fast growing countries of India and China. BUD bought China's Harbin Brewery and it has long held a stake in Tsingtao. There have been rumors that BUD might buy Belgian brewer InBev (INB), with whom it already has a product distribution agreement.

In the U.S., the nation's second and third-largest brewers, SABMiller and MolsonCoors, are taking steps to combine in order to better compete against Anheuser-Busch.

When we analyzed BUD after the September quarter, the Overall score was an unspectacular 27 points. Of the four individual gauges that fed into this composite result, Growth was strongest at 13 points. Value was weakest at 3 points.

Now, with the available data from the December 2007 quarter, our gauges display the following scores:

Before we examine the factors that affected each gauge, let's compare the latest quarterly Income Statement to our previously announced expectations.


Dec 2007
Dec 2007
Dec 2006
Op expenses

CGS (2635)

SG&A (783)

Other 0
Operating Income
Other income

Equity income

Interest, etc.
Pretax income

Income tax

Net Income

0.38/sh 0.38/sh

BUD's Revenue in the December 2007 quarter was 7.9 percent greater than in the year-earlier quarter; our estimate for Revenue Growth was 7.1 percent. Year-over-year Revenue Growth was 6.2 percent, which just slightly exceeded our estimate of 6.0 percent.

Operating expenses were significantly higher than we expected. We thought the Cost of Goods Sold (CGS) would be 69 percent of Revenue, and the actual value was 71.3 percent. The situation wasn't as bad with Sales, General, and Administrative (SG&A) expenses, which were 21.2 percent of Revenue -- just over our forecast of 21 percent.

The higher CGS caused Operating Income to fall 25 percent below the forecast value.

Equity income less interest expense was a substantial $42 million below our estimate. On the other hand, the Income Tax Rate (not adjusted for equity income) was only 24 percent, instead of the predicted 32 percent.

The net effect was Net Income 24 percent below our prediction.

Cash Management. This gauge decreased from 4 points in September to 3 points now.

The measures that helped the gauge were:
The measures that hurt the gauge were:
  • Inventory/CGS = 23.9 days, compared to 22.7 and 24.2 days 3 and 12 months ago, respectively (note: we don't yet have the data identifying the finished goods component of inventory)
  • Current Ratio =0.9; weaker than we like, but matching the 5-year median value
  • LTD/Equity = 290 percent; highly leveraged and becoming more so as stock repurchases cut the Equity level
  • Debt/CFO = 3.2 years, compared to 2.9 years 3 and 12 months ago
  • Days of Sales Outstanding (DSO) = 16.7 days, up from 16.3 days one year earlier
  • Working Capital/Market Capitalization = -0.6 percent, compared -0.9 percent one year earlier.

Growth. This gauge decreased from 13 points in September to 9 points now.

All of these measures had a small, but positive effect on the gauge score.
  • Revenue growth = 6.2 percent year-over-year, up from 4.5 percent
  • CFO growth = 8.5 percent year-over-year, up from 0.3 percent
  • Net Income growth = 7.6 percent year-over-year, matching the previous year's growth rate
  • Revenue/Assets = 97.3 percent year-over-year, up from 96.0 percent; sales efficiency is improving.
The Net income growth rate was neither helped, nor hurt, by a change in the income tax rate. The rate stayed at 31.4 percent

Profitability. This gauge decreased from 12 points in September to 11 points now.

The measures that helped the gauge were:
  • FCF/Equity = 65.7 percent (excellent), up from 48.2 percent in a year
  • ROIC = 16.2 percent, matching last year's value
The measures that hurt the gauge were:

Value. BUD's stock price rose over the course of the quarter from $49.99 to $52.34, before receding in January. The Value gauge, based on the year-end price, decreased to 1 point, compared to 3 points three months ago (and 2 points twelve months ago).
The average P/E for the Alcoholic Beverages industry is 18. The average Price/Revenue for the industry is currently 2.0.

Now at 22 out of 100 possible points, the Overall gauge remains weak. The shares continue to trade at hard-to-explain premiums to the market, given that the growth rates are modest and operating costs are rising. Pleasing EPS growth rates can be partially attributed to the 4.8 percent reduction in the number of diluted common shares.

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