04 June 2008

BUD: Look Ahead to June 2008 Results

In late May, earlier rumors that Anheuser-Busch Companies, Inc. (BUD) and InBev (INB) might combine heated up with news that the giant Belgian firm was working on a $46 billion offer for the top brewer in the U.S. InBev is reportedly seeking $50 billion of financing for this deal.

When we analyzed BUD's first quarter of 2008, our Overall Gauge advanced to 39, out of 100 possible, points, up from 23 points at the end of 2007. The current score might not be great, but it is the highest figure we've ever calculated for BUD. Growth and Profitability have improved, yet the share price weakened in the first quarter.

It's true that pleasing EPS growth rates can be partially attributed to the 6.6 percent reduction in the number of diluted common shares over the last 12 months. In addition, we were concerned about a rise in the Finished Goods/Inventory ratio. An increase in this metric, more than what we saw with BUD, can be an early warning that Sales were below expectations.

On 23 July 2008, Anheuser-Busch will report its results for the quarter ending 30 June. In anticipation of this report, we've modeled BUD's Income Statement for the quarter. The intent of this exercise was to produce a baseline for identifying any deviations, positive or negative, in the actual data. GCFR estimates are derived from trends in the company's historical financial results and guidance provided by company management.

BUD reiterated its outlook for 2008 at a conference call to review first-quarter results with financial analysts.

The company doesn't provide explicit Revenue guidance. We do know that management expects Revenue per barrel to increase between 2.5 and 3 percent. Our target for second quarter Revenue, based on trend analysis, is $4.8 billion. This figure is 6.2 percent more than Revenue the June 2007 quarter, and it would translate into year-over-year 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. We think BUD can achieve a Gross Margin in the second quarter of 35 percent of Revenue, which would equate to a CGS of (1- 0.35) * $4.8 billion = $3.1 billion.

Sales, General, and Administrative (SG&A) expenses are usually around 17 percent of Revenue, although higher in the fourth quarter. If this pattern holds true, SG&A expenses should be approximately 0.17 * $4.8 billion = $816 million.

These figures would result in Operating Income, as we define it, of $864 million in the quarter. This figure is 4.1 percent less than the $901 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 "Equity income is now expected to decline in 2008 versus normalized 2007." This was true in the first quarter, when Equity income declined by 20 percent. We will look for a more modest decline in the second quarter, from $195 million in June 2007 to $180 million.

Net Interest expense totaled $471 million in 2007, and the company's guidance is that this figure should increase in 2008 by $25 million to $35 million. This suggests that the net interest expense will average about $125 million.

If we use an effective income tax rate of 32 percent, Net Income would be $625 million ($0.87 per share, depending on the number of shares repurchased), compared to $677 million ($0.88 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.

June 2008 (estimated)
June 2007 (actual)
4800 4515
Op expenses

CGS (3120) (2858)

SG&A (816) (756)

Other 0 0
Operating Income
864 901
Other income

Equity income 180 195

Interest, etc. (125) (104)
Pretax income
919 992
Income tax
(294) (315)
Net Income
625 677

$0.87/sh $0.88/sh
Shares outstanding
715 765

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