13 April 2008

BUD: Look Ahead to 2008 First Quarter Results

Anheuser-Busch (BUD) scored only 22 of 100 possible points on our Overall Gauge when we analyzed their fourth-quarter and full-year results for 2007. Among other things, the analysis noted BUD's high debt levels (LTD/Equity = 290 percent) and modest growth rates. For example, Revenue grew by 6.2 percent last year, and Net Income increased by 7.6 percent. (Because the number of common shares was reduced by 4.8 percent in 2007, the more highly touted Earnings Per Share rose by a more robust 13 percent.) We were also a little concerned that the Finished Goods/Inventory ratio increased from 28.6 percent at the end of 2006 to 34.3 percent at the end of 2007. In general, we do not like to see a sharp increase in the Finished Goods ratio because it can be a sign of Sales below expectations.

BUD management recently reiterated optimism about sales and profitability. They have established long-term objective for earnings per share growth of 7 to 10 percent. (As mentioned above, the "per share" part of this goal allows share repurchases to contribute to its attainment.)

A report, expected 23 April, on BUD's results for the recently concluded first quarter of 2008 will give investors an early opportunity to judge whether the optimism is warranted. As usual, we've made an estimate of these results, which will then serve as a baseline for identifying any deviations, positive or negative, in the actual data. The foundation for our estimate is company guidance expressed during the January conference call and historical data trends.

The company doesn't provide explicit Revenue guidance. However, they have noted that a favorable pricing environment should lead to a 2.5 to 3 percent increase in Revenue per barrel. Given the company's rosy statements, we're expecting to see Revenue grow at a slightly accelerating pace. Our target for first quarter Revenue is $4.1 billion, which would be 6.3 percent more than in the March 2007 quarter, and which would translate into year-over-year Revenue growth of 7.0 percent.

Increasing prices for agricultural commodities have put some pressure on BUD's Gross Margin. BUD stated that the Cost of Goods Sold (CGS) per barrel would increase in a range between 3 and 3.5 percent. In 2007, CGS averaged 65 percent of Revenue. Our expectation for the first quarter of 2008 is 65.5 percent of Revenue, or 0.655 * $4.1 billion = $2.7 billion.

Sales, General, and Administrative (SG&A) expenses averaged 18 percent of Revenue in 2007. Since first quarter marketing expenses tend to be a little less than the average, we're going to look for 17.8 percent in the March 2008 quarter. Therefore, SG&A expenses should be approximately 0.178 * $4.1 billion = $730 million.

These figures would result in Operating Income, as we define it, of $685 million in the quarter, which would be a little less than the $718 million in the year-earlier quarter. The reduction is because we assumed a higher CGS as percentage of Revenue. If BUD can achieve efficiencies to compensate for higher raw material costs, it will show itself here.

BUD stated that "first quarter equity income is expected to decline in comparison with the very strong 30% equity income growth in the first quarter last year." Since Equity Income was $159 million in the March 2007 quarter, we'll set $150 million as the target for the March 2008 quarter.

Net Interest expense has been averaging about $115 million per quarter. If this value held true in the first quarter, pre-tax income will be $720 million. If we use 2007's income tax rate, Net Income would be $494 million ($0.67 per share, depending on the number of shares repurchased), compared to $518 million (also $0.67 per share) . (Our estimate for the tax rate is different from the company's because of the way we handle Equity Income, which is, strictly speaking, net-of-tax.)

Please note that the table format below, which we use for all analyses, can and often does differ in material respects from company-used formats. A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.


March 2008
March 2007
Op expenses

CGS (2686)

SG&A (730)

Other 0
Operating Income
Other income

Equity income

Interest, etc.
Pretax income

Income tax

Net Income


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