Drip Portfolio Report
Tuesday, November 18, 1997
by Jeff Fischer (TMFJeff@aol.com)

ALEXANDRIA, VA (Nov. 18, 1997) -- Yesterday we introduced Anheuser Busch (NYSE: BUD), the King of Beers, and we didn't even title the column "This Bud's for you," or "I love you, man." We could have named the column either and most everyone would have known immediately what we were talking about. Budweiser has done a great job marketing its brand around the world and, as a result, the company owns 45% of the U.S. beer market and 8% of the international market.

We mentioned yesterday that Anheuser's brands include Budweiser, Bud Light, Michelob, Busch, and over 35 other brews. The company also operates theme parks, but management has sold off its snack food division and baseball team. You'd think that with those recent sales the company would be cash rich. Today we'll see if that's the case when we look at Bud's valuation, expected growth, and balance sheet. Should we all be saddling up to the bar and ordering some Bud stock? Let's find out.

Valuation and Growth: Anheuser Busch's market cap at a recent $43 per share is $21.2 billion, obtained by multiplying all of the outstanding shares by the share price (491.7 million shares * $43 per share). With trailing sales of $11 billion, the stock trades at less than two times sales. Coca-Cola (NYSE: KO), with twice the sales, has a market cap of $150 billion, or over seven times sales. It's easy to see which company is more popular with investors.

The enterprise value of a company is more meaningful than market cap alone. Bud has $149 million in cash and $4.185 billion in long-term debt. Because an acquiring company would consider this when valuing Bud, we subtract the cash and add the debt to the market cap to get a more accurate value for the company -- the enterprise value. This is $25.2 billion.

To figure the enterprise value relative to sales, we simply take enterprise value and divide it by trailing sales. Bud's equals 2.29 ($25.2 billion / $11 billion in sales). So, the company isn't really valued at less than two times sales when you consider the cash and debt that it holds, but at slightly more than two times sales.

In the income arena, Bud trades at 18.4 times trailing earnings, 17.4 times fiscal '97 earnings estimates of $2.37 per share, and 16.9 times estimates of $2.54 for fiscal 1998. Over the last five years the company has grown earnings 10% annually, and the company is expected to grow earnings 9% annually over the next five years. What's interesting about the next five years, though, is that only in 1996 did Anheuser ditch its non-core businesses (but for its theme parks) and begin to focus mainly on beer.

Margins: Operating earnings divided by total revenue give us the operating margins. This number shows what the company is earning after the cost of the product and all the costs of running the business are subtracted. In Bud's case (no pun intended), the trailing operating margin is 18.6%. (You can get these numbers online from the Fool's Company Snapshot feature on the Web.) With operating margins of 18.6%, Bud is among the top 10% of all companies.

The next measure below operating margins is net margins, which is net income divided by total revenue. Net income shows what a company is earning after taxes, and this is the number that is announced as the Earnings Per Share figure. In Bud's case, the company has net margins of 10.7% over the last year, again putting it among the best of the best. Any company with double-digit net profit margins is in a league of its own.

Leverage: Long-term debt divided by revenue is one of the most useful ways to think about debt. While doing this, it's important to figure out why a company has debt. As Bud recently sold some divisions, the heavy debt is a little disappointing. If the company had recently bought new divisions (divisions that would add to earnings) the debt would be more acceptable. With $4.185 billion in long-term debt and $11 billion in sales, we have a 38% debt-to-sales ratio. This is a strike against Bud.

Capital allocation: Management pays a decent 2.4% dividend, though it doesn't routinely repurchase shares. The company is investing in international brewers and is always increasing marketing in order to build brand awareness and to hopefully continue to gain market share. In 1996 Anheuser Busch was one of the only large American beer companies to grow sales volume (even while increasing prices).

The Snapshot for The King of Beers:

Ticker: BUD
Recent Price: $43

Trailing 12-month sales: $11 billion
Trailing 12-month oper. earnings: $1.18 billion
Trailing 12-month EPS: $2.36

Fiscal '97 EPS estimates: $2.37
Fiscal '98 EPS estimates: $2.64

Enterprise value to sales: 2.29
Current P/E: 18.4
P/E on 1998 EPS: 16.9
Long-term expected growth rate: 9%
Yield: 2.40%

Conclusion: Following this overview we conclude that the company is worth considering. Therefore, it doesn't fall off our list of food and beverage stocks, though the substantial debt and 9% growth rate will put it much nearer the bottom of the list than the top. Also, the fact that the beer industry isn't really growing, but that Budweiser has been able to grow by grabbing market share and (in 1996) increasing prices, makes us a bit leery. How much can a company continue to grow if its industry is more or less stagnant? Even the soft drink industry is growing more steadily than the beer market. What's interesting about Bud now, though, is that it was only 1996 that the company dumped non-core divisions and began to focus on the beer business almost entirely. We of course like this development and hope that it can lead to increased efficiency and higher margins. Also, Bud's size and ability to invest internationally should help fuel growth, if primarily through acquisition. The marketing power of the company shouldn't be underestimated either, and so an even greater market share in the future is probably a realistic bet.

Tomorrow we'll look at Campbell Soup (NYSE: CPB). Fool on!

--Jeff Fischer

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Stock   Close    Change
INTC  $78 3/4  -1 11/16
JNJ   $63       -  7/16
              Day    Month     Year    History
Drip        (1.02%) (1.26%) (10.04%)   (10.04%)
S&P 500     (0.84%)  2.58%   26.66%     (1.38%)
Nasdaq      (0.85%)  0.43%   23.97%      0.42% 

Last Rec'd    Total #    Security   In At    Current
11/03/97      4.835       INTC     $81.623   $78.750
11/14/97      1.000       JNJ      $60.560   $63.000

Last Rec'd    Total #  Security   In At    Value    Change
 11/03/97      4.835     INTC    $394.69  $380.80  ($13.89)
 11/14/97      1.000      JNJ     $60.56   $63.00    $2.44 

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GOAL: The portfolio began with $500 on July 28, 1997, 
adds $100 on the 15th of every month, and the goal 
is to grow the port to $150,000 by August of the year 2017. 

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The Drip Portfolio has been divided into 
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