Value Investors Club / Anheuser-Busch Cos.Inc. (BUD)

Description

Anheuser-Busch Companies Inc. is the largest beer producer in North America. It also owns 50% of Modelo (Corona, among others), and 27% of Tsingtao (a Chinese brewer). The industry is typically a low growth category, with recent intrusions from both craft beers, like Sam Adams, and foreign brews, like Heineken. As a result, BUD has experienced modest market share erosion. Additionally, the costs of producing beer have risen: energy, malt, wheat. These problems have been offset with commensurate price increases. The result has been top-line growth at BUD: 1.6% in 2007, 0.4% in 2006, flat in 2005, 1.0% in 2004, 0.8% in 2003. Operating margins have drifted lower, but remain at high levels: 17.2% in 2005, 2006, 2007. After years of transition, BUD is pursuing aggressive cost reduction, and economies of scale in distribution. To simplify the story: the top-line will grow very slowly, margins will be stable to up, and because this is a huge free cash flow business ($2.0b p.a.), EPS will grow at 9%+ (owing to share buybacks). In the meantime, shareholders collect a 3% yield, which grows at 10% p.a.

Importantly, I believe that the story is now a very low risk investment, with the principal exposure being a price war in a duopoly (a very rare occurrence). There are several pleasant surprises which could occur: a diminution in COGS (mostly energy, 5%, malt/ barley prices, 7%, and aluminum/ glass, 7%), a trade-down from craft and foreign premium beers, an improvement in the InBev distribution partnership (Stella Artois, Becks, Bass). Eventually, BUD will merge with InBev (because of the benefits of economy of scale), and you get that option for free (some have thought InBev will pay $70+ per share). Using the 2008 consensus estimate of $3.03, and applying a 14x (historically p/e has been 18x-22x) and dividend income for the next twelve months, one gets to $43.83 – a 4% decline. The dividend discount model yields a $57.28 value, or IRR of 9.4% – achieved with very little expected risk. Bottom line: a very low risk, modest rate of return investment, with a free call on a high probability (long tail) takeover up 50%.

Date:	2007	LTM	LTM	LTM	2006	LTM	LTM	LTM	2005
Sales	16,686	16,416	16,079	15,820	15,717	15,658	15,466	15,228	15,036
Cost of Goods Sold	10,836	10,643	10,419	10,222	10,165	10,105	9,974	9,793	9,606
SG&A	2,982	2,964	2,924	2,883	2,833	2,866	2,836	2,834	2,838
Operating Income	2,868	2,810	2,736	2,715	2,720	2,687	2,656	2,601	2,592
Interest Expense	467	452	444	439	434	434	436	436	435
Net Non-Oper Loss	(685)	(691)	(649)	(607)	(580)	(548)	(423)	(398)	(398)
Income Tax	970	956	918	900	901	894	855	819	811
Inc(Loss) bef	2,115	2,092	2,023	1,984	1,965	1,907	1,787	1,743	1,744
Extraord L(G)	-	-	-	-	-	-	-	-	-
Minority Interests	-	-	-	-	-	-	-	-	-
Net Income	2,115	2,092	2,023	1,984	1,965	1,907	1,787	1,743	1,744
Depreciation	996	997	993	989	989	987	988	988	979
Other Non-Cash	(148)	(227)	(200)	(337)	(433)	(294)	(262)	(284)	(72)
Work Cap	(24)	75	127	(57)	189	180	239	171	50
CFO	2,940	2,936	2,943	2,578	2,709	2,779	2,752	2,619	2,702
Disposal of Fixed	-	-	-	-	-	(48)	-	-	-
CapEx	(870)	(891)	(841)	(808)	(813)	(800)	(889)	(1,019)	(1,137)
FCF	2,070	2,046	2,102	1,771	1,897	1,979	1,863	1,600	1,565

Date:	2007	LTM	LTM	LTM	2006	LTM	LTM	LTM	2005
chg sales	*1.6%*	2.1%	1.6%	0.7%	*0.4%*	1.2%	1.6%	1.3%	*0.0%*
Sales	1.000	1.000	1.000	1.000	1.000	1.000	1.000	1.000	1.000
Cost of Goods Sold	0.649	0.648	0.648	0.646	0.647	0.645	0.645	0.643	0.639
SG&A	0.179	0.181	0.182	0.182	0.180	0.183	0.183	0.186	0.189
Operating Income	0.172	0.171	0.170	0.172	0.173	0.172	0.172	0.171	0.172
Interest Expense	0.028	0.028	0.028	0.028	0.028	0.028	0.028	0.029	0.029
Net Non-Oper Loss	(0.041)	(0.042)	(0.040)	(0.038)	(0.037)	(0.035)	(0.027)	(0.026)	(0.026)
Income Tax	0.058	0.058	0.057	0.057	0.057	0.057	0.055	0.054	0.054
Inc(Loss) bef	0.127	0.127	0.126	0.125	0.125	0.122	0.116	0.114	0.116
Extraord L(G)	-	-	-	-	-	-	-	-	-
Minority Interests	-	-	-	-	-	-	-	-	-
Net Income	0.127	0.127	0.126	0.125	0.125	0.122	0.116	0.114	0.116
Depreciation	0.060	0.061	0.062	0.063	0.063	0.063	0.064	0.065	0.065
Other Non-Cash	(0.009)	(0.014)	(0.012)	(0.021)	(0.028)	(0.019)	(0.017)	(0.019)	(0.005)
Work Cap	(0.001)	0.005	0.008	(0.004)	0.012	0.011	0.015	0.011	0.003
CFO	0.176	0.179	0.183	0.163	0.172	0.177	0.178	0.172	0.180
Disposal of Fixed	-	-	-	-	-	(0.003)	-	-	-
CapEx	(0.052)	(0.054)	(0.052)	(0.051)	(0.052)	(0.051)	(0.058)	(0.067)	(0.076)
FCF	0.124	0.125	0.131	0.112	0.121	0.126	0.120	0.105	0.104
EPS	2.79	-	-	-	2.53	-	-	-	2.23
chg in EPS	*10.3%*	0.0%	0.0%	0.0%	*13.5%*	0.0%	0.0%	0.0%	*-19.5%*

	BUD	JNJ	KMB	PG	TAP	MSFT	GE
PE y2	13.9	13.8	12.7	17.2	14.6	13.3	12.6
PE y1	15.3	14.7	13.8	19.2	15.1	14.9	13.4
PE y0	16.7	15.7	14.8	20.2	17.6	15.3	14.9
p/bv	10.6	4.3	5.1	4.0	1.3	7.6	2.9
p/ ebitda	9.0	10.4	7.8	11.4	9.4	13.6	9.6
dividend %	3.0	2.8	3.6	2.1	1.5	1.5	3.7
ev/ ebitda	12.1	10.7	10.1	13.4	10.3	12.6	23.2
p/ fcf	18.9	15.8	21.1	18.5	51.4	17.2	13.4
grow est.	9.3	8.4	7.9	12.4	12.3	11.9	10.8
hist growth	1.8	9.9	1.7	18.9	25.2	12.4	9.5
int coverage	5.9	35.7	9.7	11.9	5.1	nm	12.8
td/ ebitda	2.4	0.5	1.5	1.9	2.3	-	14.4
roe	59.7	25.6	32.2	16.1	7.7	39.5	19.6
fin leverage	4.7	1.8	3.1	2.2	1.9	1.9	6.6
asset turns	1.0	0.8	1.0	0.6	0.5	0.8	0.2
npm	12.7	17.3	10.0	14.0	8.0	29.3	13.1
opm	17.2	24.9	14.9	20.3	12.2	39.7	15.1
eps y1	3.03	4.43	4.57	3.49	3.45	1.87	2.43
est qtr	0.72	1.19	1.07	0.81	0.28	0.45	0.51
reinvest	nm	1.6	nm	nm	1.5	1.9	1.7
p/ sales	2.1	3.1	1.5	2.7	1.5	4.6	2.0
etr	31.4	20.4	21.5	29.7	0.8	30.0	15.0
pbo	(184)	(1,533)	(753)	(2,469)	(212)	NM	15,150
roc	20.4	21.9	18.7	11.1	7.3	39.5	4.2
last	46.10	65.18	62.99	66.54	52.08	28.04	33.82

Note: some prices have changed since this chart was prepared.

Catalyst

Price increases
Trade-down from expensive alcoholic beverages
Consolidation with Modelo and InBev

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			2008	2009
Price:	48.00	EPS
Shares Out. (in M):	0	P/E
Market Cap (in $M):	34,208	P/FCF
Net Debt (in $M):	0	EBIT	0	0
TEV (in $M):	0	TEV/EBIT