Bud Brews Mediocrity

Today's first-quarter results from Anheuser-Busch (NYSE: BUD  ) are a lot like Bud Light: slightly disappointing, but inoffensive and reliable. The company performed well domestically in the face of raw-material cost inflation, but trouble at Grupo Modelo -- the maker of Corona, of which A-B owns 50% -- put a dent in the American brewer's bottom line.

Net revenue grew 6.2% compared with a year ago, and operating margins held steady at 18.6%. As I said, inoffensive. The disappointing part came from south of the border. Grupo Modelo struggled with commodity and operating costs, which led to a 21% decrease in equity income and a slight decline in net income. Excluding a one-time charge, equity income fell almost 32%. And that's no small matter, because equity income makes up more than a quarter of A-B's net income. Although I think results at Modelo will improve, it's hard to imagine A-B's stock price moving in a positive direction with its main growth engine disabled.

Diluted earnings per share grew 6%, but investors should look at this result closely. It came as the company gulped down its own shares through buybacks. Shares outstanding decreased by almost 7% compared with a year ago. I know, investors love buybacks. I'm one of them. But this game has a limited life.

The company has aggressively increased its debt level over the past few years and used the bulk of the proceeds to reduce shares outstanding. Since the fourth quarter of 2005, total debt has increased from $7.9 billion and now stands at $9.3 billion. True, diluted shares outstanding have decreased by more than 8% over this time, but the effects aren't that notable. Over the past two years, net income has grown 10.1% annually, and the share repurchased boosted the per-share figure up just 2%, to 12% annual growth.

When the company finds itself no longer able to pull the debt lever to boost earnings per share, investors will probably face a minuscule EPS growth outlook. Maybe then the company will decide to team up with perennially rumored suitor InBev.

All of this news makes it hard for me to get excited about Anheuser-Busch's prospects. The dividend yield is decent at about 2.7%, and the core business is steady, but the competition is tough nowadays. More importantly, trends in the beer market don't look all that favorable toward the type of brew Anheuser-Busch is known for creating. Craft beers seem to be the source of growth in the beer market.

Investors looking to get involved in the domestic beer world would be better served to look at Molson Coors (NYSE: TAP  ) , which is entering into a joint venture with SABMiller, assuming antitrust forces don't quash the deal. Though they all face a bleak commodity cost outlook, the Miller-Coors joint venture would benefit from cost savings that A-B investors took for granted years ago.

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