"Budweiser is by far the leading super-premium brand in China."
(Pause for laughter.)
Anheuser-Busch (NYSE:BUD) CFO W. Randolph Baker buried that punch line in the middle of yesterday's earnings guidance. But aside from that oversight, the news sounded far from flat.
Business in China is indeed good, and it's even better in Mexico. Here at home, industrywide beer-shipment volume is clocking in at about 2% annual growth, much like last year, and ahead of expectations. Sales rose last quarter -- not just at A-B, but also at rivals Boston Beer (NYSE:SAM) and Molson Coors (NYSE:TAP). And despite rising raw-material costs, A-B seems pretty confident that it will exceed its long-term goal of 7% to 10% per-share profits growth this year.
Working off last year's $2.53-per-share profit, Bud seems committed to turn in at least $2.78 per share this year. Having already earned $2.49 through the first three quarters, the company should easily pull down the extra $0.29 it needs to hit the target.
So why, upon hearing the news, did Wall Street sell off the stock by more than 1%, on a generally up day for the market?
I see a few possible answers. For one thing, investors could doubt management's prediction, since Q4 has historically been A-B's weakest seasonal quarter; it's been two years since the last time A-B earned $0.29 in a fourth quarter. Or investors may buy management's promise but find it less filling than the number Wall Street promised them. Analysts predict $2.82 per share, and $2.78 barely matches the lowest estimate on record.
But I look at Baker's estimate that A-B will spend $2.7 billion buying back shares this year as a sort of "management put." If net earnings appear that they might come up short, A-B can always buy back enough shares to boost the per-share figure by a penny or three, and still make good on its promise.
The real reason
Ultimately, I think the real reason Bud sold off yesterday had little to do with this year's guidance. It had more to do with management's commitment -- foreshadowed in the press release, but made concrete only in a subsequent investor conference -- to increase advertising spending by double digits in 2008. Baker mentioned that consumers, knowing how commodity prices are rising, seem willing to pay a little more for A-B products to cover these costs. It remains to be seen, however, whether they'll pay even more to cover the cost of TV commercials.
All I can say is that the commercials had better be as entertaining as the crack about Budweiser being a super-premium brand.
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