Saturday, December 02, 2006

BUD Analysis

In this article, we will look at the iconic beer manufacturer BUD and see if it would make a good investment.

The company's goals as stated in its 10-K are as follows:

Anheuser-Busch remains focused on its three core objectives designed to enhance long-term shareholder value:

▪Increasing domestic beer segment volume and per barrel profitability which, when combined with market share growth, will provide the basis for earnings per share growth and improvement in return on capital employed.

▪Increasing international beer segment profit growth. Anheuser-Busch has made significant marketing investments to build recognition of its Budweiser brands outside the United States and owns and operates breweries in China, including Harbin Brewery Group, and in the United Kingdom. The company also has a 50% equity position in Grupo Modelo, Mexico’s largest brewer and producer of the Corona brand, and a 27% equity position in Tsingtao, the largest brewer in China and producer of the Tsingtao brand.

▪Continued growth in pretax profit and free cash flow from the packaging and entertainment segments. Packaging operations provide significant efficiencies, cost savings, and quality assurance for domestic beer operations. Entertainment operations enhance the company’s corporate image by showcasing Anheuser-Busch’s heritage, values and commitment to quality and social responsibility to 21 million visitors annually.

2005 was a disappointing year for BUD as net sales increased by only 0.5% and EPS declined by 15%. In 2005, BUDs sales in the US declined slightly whereas its international volume increased significantly.

However, the company has rebounded from its disappointing 2005 with increase in operating cash flows of about 11% in 2006 compared to 2005. Let us look at some other financial ratios.

The company has very good return on equity, return on asset and return on invested capital ratios.

For ten years from 1996-2006, the EPS increased by 8.06% on the average for BUD. The number of outstanding shares declined by 23% in the same period helping the EPS as well as dividends per share. The revenues in this period have increased by 4.8% where as the gross profit has increased by 6.4% on the average. The free cash flow in the same period increased an average of 7.8% per year compounded. Dividends increased by 49% in five years from 2001 till now.

The stock price has more than doubled in the last ten years - growing at around 8% per year. About 46% of earnings are paid out in dividends. Currently the fair value of the stock is about $55 - making it undervalued by about 15%. If the stock does as well as it has in the past ten years, we are looking at a stock price of about $100 in ten years with about $15 returned back to the share holders in dividends.

So overall, one can look for a return in the 8-10% range including dividends from BUD in the next ten years. BUD's moat is the manufacturing and the distribution network and one can expect this to remain the same in the coming years in the United States.

SAB Miller, the main US competitor - though posting strong results world wide ( and showing strong stock performance as well ) got bruised in north america. In its earning report, SAB Miller says - "In North America Miller Brewing Company has continued to be impacted by competitive pricing conditions and significant increases in commodity and energy prices." The operating margins declined for SAB Miller by 1.2% points to 9.6% in the U.S. The figure for BUD is about 16%. This shows the efficiencies and the moat the company has against its competitors. SAB Miller has a good global presence and this is an area to improve for BUD.


jpbel said...

has brk.a sold shares recently?
Will Bud have to divesify into
non beer products to grow?

changpeng05 said...

You are right - branching into non beer ( such as liquor and imported beer ) would play into BUD's strengths. The EPS growth has come from share buy backs - hopefully this will continue along with product diversification.