It's hard not to wonder whether management at Anheuser-Busch (NYSE: BUD ) has been partying a little too hard lately. The company's shares have returned a mere 0.6% to investors over the past five years, compared with the 55% gains the Dow Jones U.S. Consumer Goods index produced in the same time frame. Is the brewer's stock finally ready to sober up?
Anheuser-Busch commands approximately 50% of the U.S. beer market, boasting a powerful distribution system for strong brand names such as Budweiser and Bud Light. The company is keen on creating shareholder value, delivering a greater than 50% return on equity over the past few years, in addition to paying a steady dividend that currently yields around 2.7%. Investors who are anxious about discouraging economic trends might consider this an opportune time to pick up shares of the king of beers, since it's trading at a relatively attractive 18 times next year's earnings. That's less than the average company in the consumer staples sector.
Anheuser-Busch's recent weak stock performance reflects concerns surrounding the future for both the company and the overall beer market. While I don't see beer disappearing from our culture anytime soon, its sales growth has been anemic, while the market for wine and spirits has become more lucrative. Within the domestic beer segment, consumer tastes are shifting away from mass-market brews, toward more flavorful craft beers and imports. The overall effect of these two trends has favored distillers such as Diageo (NYSE: DEO ) and Constellation Brands (NYSE: STZ ) and smaller brewers such as Boston Beer (NYSE: SAM ) .
In addition, increasing competition from other large domestic brewers has further complicated Anheuser-Busch's efforts to grow revenue in the category of moderately priced, mass-marketed beers. The announced merger of Molson Coors (NYSE: TAP ) and SABMiller will up the stakes here in the U.S. The challenging market has sapped Anheuser-Busch's sales growth, which has averaged just 4% annually and squeezed its margins.
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Metric
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12/31/03
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12/31/04
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12/31/05
|
12/31/06
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LTM 9/30/07
|
|
Gross Margin %
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40.30%
|
39.60%
|
36.10%
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35.30%
|
35.20%
|
|
EBIT Margin %
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22.60%
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21.30%
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17.20%
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17.30%
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17.10%
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Net Income Margin %
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14.70%
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14.20%
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11.60%
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12.50%
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12.70%
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In response to this evolving competitive landscape, Anheuser-Busch is working aggressively to develop new sources of growth, both in the U.S. market and abroad. It bought a 50% stake in Grupo Modelo, which brews the highly popular Mexican export Corona. Additionally, it owns a 27% stake in Tsingtao Brewery, which has a 14% market share in China. With Asia expected to provide an estimated 80% of global beer sales by 2010, Anheuser's increased focus on international operations should help the company regain growth, helping to offset its sluggish 3.1% domestic expansion in 2006.
Sales from Anheuser-Busch's international operations increased more than 10% in the first nine months of this year, compared with slightly more than 5% sales growth in the company's domestic beer segment. If Anheuser can successfully continue its international expansion, or structure a joint venture with another leading brewer, the company's growth should further accelerate.
At this point in the economic and market cycle, when it might be especially shrewd for investors to consider adding to their allocation of consumer-staple stocks, Anheuser-Busch looks like a tempting value. The stock has a competitive P/E among its fellow brewers, and it seems to trade at a discount to other defensive companies such as Procter and Gamble (NYSE: PG ) or Coca-Cola (NYSE: KO ) . Additionally, it tops its competitors in operating efficiency (one of the reasons SAB and Molson Coors joined forces), and it still leads in domestic market share. Such characteristics typically warrant a premium share price.
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