15 November 2008

BUD: Financial Analysis through September 2008

Anheuser-Busch Companies, Inc. (NYSE:BUD), the nation's top brewer, announced its results, and submitted a 10-Q, for the third quarter of 2008. 

The September quarter will be the last period that ends with an independent BUD.  Although a closing date as not yet been announced, one of the last hurdles to the acquisition of BUD by Belgian brewer InBev (EBR:INB) was overcome when both parties reached an agreement with the U.S. Department of Justice.

BUD's shareholders approved the deal, which will bring them $52 billion in cash ($70 per share), on 12 November 2008.  This deal comes after SABMiller plc (LON:SAB) and MolsonCoors (NYSE:TAP), agreed to combine their American businesses.

Three months ago, when we analyzed BUD's second quarter, the GCFR Overall Gauge fell from 41 to 18 of the 100 possible points.  The contrarian Value gauge fell in a seesaw response to the jump in BUD's share price, which occurred after the InBev offer was made.  But the Overall gauge drop wasn't just a reaction to the share price: the Growth and Profitability gauges were also down in the second quarter.

Now, with the available data from the September 2008 quarter, our gauges display the following scores:

Before we examine the factors that affected each gauge, we will review the latest quarterly Income Statement.  We didn't issue any predictions for BUD's third quarter. 

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.

($M) September 2008
September 2007
Revenue (1) 4,916.6 4,617.7
Op expenses
CGS (2) (3,015.0) (2,868.5)
SG&A (3) (810.9) (777.4)
Other (150.9) (26.5)
Operating Income 939.8 998.3
Other income
Equity income (4) 174.2 185.2
Interest, etc. (110.5) (126.8)
Pretax income 1,003.5 1,056.7
Income tax (337.4) (350.0)
Net Income 666.1 706.7
$0.90/sh $0.95/sh
Shares outstanding 744 745
1. Net sales.
2. Cost of sales.
3. Marketing, distribution and administrative expenses.
4. Net of tax.

Third-quarter Revenue was 6.5 percent greater than in the year-earlier period.  In the last four quarters, Revenue increased 6.2 percent over the amount in the four earlier quarters.

The Cost of Goods Sold was 61.3 percent of Revenue, which translates into a Gross Margin of 38.7 percent.  The margin was 37.9 percent in the September 2007 quarter.  Management deserves credit for deftly handling increasing prices for agricultural commodities.

Sales, General, and Administrative expenses were 16.5 percent of Revenue, a few tenths of a percent less than in the year-earlier quarter.

BUD incurred a hefty operating charge in the September 2008 quarter.  The bulk of the charge went to "outside professional services related to the InBev transaction and for costs associated with the previously announced enhanced retirement program."  A small portion of this charge was offset by gain on the sale of certain distribution rights.

If special charges are excluded, BUD's Revenue growth and improved margin would have increased its Operating Income by 12.2 percent.  However, the charges included Operating Income fell by 5.9 percent.

Other income, net, rose by about $5 million.   Equity Income declined as a consequence of "higher materials and operating costs at Grupo Modelo partially offset by volume growth."

The Income Tax Rate (not adjusted for Equity Income) was 33.6 percent, a increase of 0.5% from the year-earlier quarter.

Net Income was 5.7 percent less than the year-earlier result.

Cash ManagementSeptember
3 mos.
12 mos.
Current Ratio0.81.00.9
LTD/Equity 166%207%236%
Debt/CFO  2.3 yrs2.9 yrs2.9 yrs
Inventory/CGS 23.4 days23.1 days22.7 days
Finished Goods/Inventory 38.2%42.1%39.4%
Days of Sales Outstanding (DSO)22.8 days24.5 days21.7 days
Working Capital/Market Capitalization  -1.0%-0.2%-0.5%
Cash Conversion Cycle Time-4.5 days-1.9 days-3.0 days
Gauge Score (0 to 25)434

BUD found a way to slash its debt ratio, perhaps because it no longer had need to repurchase its common shares.  The lower percentage of Inventory made up of Finished Goods eases our concern that sales were slowing more than expected.

3 mos.
12 mos.
Revenue growth6.2%6.6%4.8%
Revenue/Assets 100.2%99.1%97.1%
CFO growth13.4%0.0%5.6%
Net Income growth -0.6%4.9%5.9%
Gauge Score (0 to 25)10911
Growth rates are trailing four quarters compared to four previous quarters.

Cash Flow from Operations, a parameter we value highly, rose nicely the last two quarters.  Revenue growth hasn't been torrid, but it has been faster than Asset growth.

3 mos.
12 mos.
Operating Expenses/Revenue 82.4%82.8%82.9%
ROIC 16.5%16.4%16.6%
Accrual Ratio-1.5%0.7%0.6%
Gauge Score (0 to 25)141010

The consistency in Operating Expenses and ROIC is remarkable given commodity prices.  The rise in Free Cash Flow to Equity is very impressive.

3 mos.
12 mos.
P/E 23.221.317.8
P/E to S&P 500 average P/E 138%116%104%
Enterprise Value/Cash Flow (EV/CFO)16.818.215.5
Gauge Score (0 to 25)003

BUD shares edged closer to the $70 offering price during the quarter, from $62.12 to $64.88.  The figures above, which suggest InBev isn't getting a bargain, were computed using the quarter-end price.

The valuation ratios can be compared with other companies in the Beverage-Brewing industry.

3 mos.
12 mos.
Gauge Score (0 to 25)241824

Considering the headwind caused by buyout offer's effect on the Value gauge, the increase in Overall gauge indicates a moderately good quarter.  The three other gauges all rose. 

InBev is making a major bet that they can exploit the synergies between their existing operations and those of Anheuser Busch.  The numbers above suggest that BUD is on an upswing, but InBev is paying a substantial price for the opportunity.

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