09 March 2008

BUD: Financial Analysis through December 2007 (Update)

We previously posted an analysis of Anheuser-Busch's (BUD) preliminary report on the December 2007 quarter. This report was, for our gauge-calculation purposes, reasonably complete. The only missing data was the decomposition of total Inventories into their Raw Materials, Work in Process, and Finished Goods components. We obtained the Inventory data when BUD filed a 10-K annual report with the SEC.

With the Inventory breakout figures, we are now able to compute the Finished Goods/Inventory ratio. This metric, which contributes to the Cash Management gauge, was 34.3 percent on 31 December 2007, a rather substantial increase from 28.6 percent in December 2006. In general, we do not like to see a sharp increase in the Finished Goods ratio because it could be an early warning that Sales were below expectations. In this case, our concern is eased by knowledge that total Inventories are under control, as seen by Inventory/CGS dropping from 24.2 to 23.9 days.

The additional data did not change the gauge scores, which remain as shown below:

We also recalculated the Accrual Ratio using a formula we've been using in the analyses performed recently. The value was determined to be +0.9, a slight improvement over last year's value of 1.0 percent (lower values may indicate higher quality earnings). With the older formula, the values were +0.3 and +0.4 percent, respectively.

See our previous post for an examination of BUD's Income Statement for the quarter ending on 31 December 2007.

We had an opportunity to scan the 10-K's notes to the financial statements. Our sense is that the notes are above-average in clarity. We didn't find anything out of the ordinary, but there were a few tidbits worth mentioning:

One note describes the different methods the company uses to establish the values of its Inventories. At the end of the note, a statement indicates that the December 2007 total valuation would have increased by $183.6 million had BUD used the average-cost method (to the exclusion of all other methods) for valuing all inventories. This amount is 25 percent of the reported total inventory level of $723.5 million. It is a reminder that many assumptions determine the figures shown in a company's financial statements, and changes to these assumptions can lead to significantly different results.

BUD's investment in Mexican brewer Grupo Modelo seems to be paying off. Dividends to BUD from Grupo Modelo increased from $240 million in 2006 to $403 million in 2007. The dividend amount is determined by a formula involving Grupo Modelo's Free Cash Flow. FCF evidently grew by more than Net Income, since the latter was up only $136 million, from $1.14 billion in 2006 to $1.28 billion in 2007.

Dividends from BUD's $276.7 million investment in China's Tsingtao brewery were $10.2 million (3.7 percent) in 2007.

BUD assumes a long-term return on pension-plan assets of 8.5 percent per annum. What's interesting about this is that BUD shareholder Warren Buffett recently commented that it is unrealistic to assume an 8 percent return. However, to the credit of BUD's investment advisors, the actual annual rate of return on plan assets, net of fees, was 14.8, 10.5 and 13.7 percent in the last three years. More than a quarter of BUD's pension plan assets are in debt securities.

The company reports total 2007 tax provisions of $1.04 billion, with only $66 million deferred.

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