Maybe, just maybe, Warren Buffett and the other investors, such as Bill Nygren, who have been touting the values available in large caps were on to something. Recent quarterly results from Inside Value selection Anheuser-Busch (NYSE:BUD) show the company is starting to build up a little steam.
The full year-over-year breakdown of financial results can be found in the Fool by Numbers published yesterday. Of particular note is the 30% increase in free cash flow. Anheuser-Busch's target capital expenditures are approximately $900 million a year for this year and each of the next four years. So far, through the nine months of the year, the company has spent $487 million, or a little more than half. It's most likely that these expenses will be made in another period -- if not next quarter, than sometime next year -- so I wouldn't adjust any valuation tremendously based on the lower capex over nine months.
The nicest thing to see in the quarter is the company's ability to take a 4.7% increase in sales and use its operating leverage to turn that into a nearly 8% earnings gain (excluding the legal settlement in 2005) -- and that's with its tax rate up 1% over last year as well. I think any investment thesis for Anheuser-Busch has a lot to do with the company's ability to take small volume gains and regularly incremented increases in price and translate them into much larger gains in earnings, because gains in sales are largely spread over the same equipment and distribution costs. The same dynamics are in play for other beverage companies, such as Coca-Cola Co (NYSE:KO), SAB Miller (OTC: SBMRY.PK), and Molson Coors Brewing Company (NYSE:TAP).
Another positive is the company's 22% pre-tax earnings growth in its international beer market, driven by strong results in China. This is another important point to consider with an investment in Anheuser-Busch, because the U.S. market is mature and highly competitive. Many international markets are also mature and highly competitive when it comes to beer, but where Anheuser-Busch can enter a market at a reasonable price and make operations more efficient, it has a chance to see decent growth. There are also those markets that are still maturing, and Anheuser-Busch can grow along with them.
At $48, Anheuser-Busch is still priced for about 7% growth and carries a 2.5% dividend yield. That strikes me as a fair valuation, given the company's current growth prospects. Those who believe international growth can continue to be robust for a number of years might be willing to pay for it at today's price.
Coca-Cola and Anheuser-Busch are Motley Fool Inside Value selections. To find out why, click here to take a free 30-day trial of the newsletter. You can tell more than 11,500 fellow investors what you think about Anheuser-Busch by joining the Fool's new stock-rating service, CAPS.
At the time of publication, Nathan Parmelee had no financial interest in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.
