It's Good to Be the King

First-quarter results at Anheuser-Busch (NYSE: BUD) prove, once again, that the ability to raise prices -- called pricing power -- continues to play a big part in the company's success.

Net earnings in the first quarter were $0.67 per share, up from $0.57 in the prior year's quarter. While part of this jump came from a commodity hedge, the biggest chunk of this 17.5% increase resulted from higher volume, and more importantly, higher revenue per barrel. While market share declined slightly for the quarter, per-barrel revenue was up 3.1% due to price hikes and higher sales of premium brands.

According to the company, price increases have twice the impact on gross margins as a comparable increase in volume, and the gross margin trend for Anheuser-Busch over the last several years proves this. The maker of Budweiser has been raising prices since at least 2000, and gross margin has increased from 32.1% that year to 34.9% in 2003 (and over 40% in the most recent quarter, though this appears to be a cyclical effect).

How did improved margins affect the bottom line? On a meager 12% growth in net sales over the three years, net income is up 34%, and free cash flow is up a whopping 67%. The company has put this free cash flow to work, buying back shares to further boost shareholder value.

My colleague Seth Jayson's take on Anheuser-Busch's first quarter is analytically accurate, but, in my opinion, misses the big picture. Since there's nothing like a good debate, I have to take issue with his conclusions. (Sorry, Seth.)

Anheuser-Busch is the dominant force in the beer market and has pricing power that its competitors, such as SABMiller, partly owned by Altria (NYSE: MO) and Adolph Coors (NYSE: RKY), can only mimic. Yes, the company was blindsided by the Miller Lite low-carb campaign, but a recovery has since taken place.

Anheuser-Busch's pricing power stems from brand loyalty and dominant market share, and without those two items, raising prices would be impossible. We learned in Economics 101 that higher prices mean less demand as people switch to cheaper alternatives. Anheuser-Busch is the exception to this rule, and rightly takes advantage of its position to produce outstanding results in a low-growth, saturated industry.

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Fool contributor Chris Mallon enjoys a beer every now and then and owns shares of Anheuser-Busch through his private investment partnership.