Anheuser-Busch InBev Looking Frothy

By Ryan C. Fuhrmann | March 03, 2012 AAA

Brewing giant Anheuser-Busch InBev SA (NYSE:BUD) recently reported full year sales and earnings results. The top-line trends were decent given Anheuser-Busch is among the largest beer makers in the world, and profit growth was impressive in the double digits. However, at the current valuation, the market is assuming more of the same for many years to come. As a result, investors could be left with a hangover. For more, see Earning Forecasts: A Primer.

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Full Year Recap
Revenue advanced 4.6% to $39 billion. Anheuser-Busch detailed that "selective price increases" offset the impact from a 0.1% decline in beer volumes. Additionally, its three global brands of Budweiser, Stella Artois and Beck's grew a respectable 3%. Management touted the continued roll out of Budweiser internationally where non-U.S. sales now account for 44% of its total sales. Non-beer volumes also grew 1.5% and continue to benefit from new product introductions, such as a cider version of Stella Artois in the U.K., the alcohol-free Quilmes Lieber beverage brand in Argentina and Harbin Ice GD in China.

Volume growth was weakest in developed markets served, falling 3.1% in North America and 2.8% in Western Europe. Growth in Latin America was positive and a more robust 6.6% in the Asian-Pacific region. Current investment in new breweries and upgraded existing facilities is centered on international markets including China, Brazil and parts of Latin America such as Argentina and Paraguay.

Cost controls sent recurring operating income up 9.7% to $12.6 billion. This represented a very healthy operating margin of 32.3% of total sales. Profits rose more than 45% to $5.9 billion, or approximately $3.67 per share. Managements estimates of "normalized" earnings, or backing out charges and costs it considers to be non-recurring in nature, was higher at $4.04 per share. Free cash flow was approximately $7.8 billion, or about $4.89 per share. To know more about income statements, read Understanding The Income Statement.

Outlook
For 2012, analysts currently project sales growth of just over 5% and total sales of $41.1 billion. They collectively expect earnings of $4.53 per share for annual growth of about 13% from the normalized earnings levels of 2011.

The Bottom Line
So far in 2012, Anheuser-Busch is the best performer in the industry. Its stock is up nearly 18% to handily beat the market's year-to-date return of around 12%. It is also outperforming peers including Molson Coors (NYSE:TAP), Boston Beer (NYSE:SAM) and Companhia De Bebidas Das (NYSE:ABV), the last of which also happens to be majority controlled by Anheuser-Busch and is also Pepsi's (NYSE:PEP) largest bottler. Other large players in the space include SAB Miller, which owns MillerCoors along with Molson Coors and Grupo Modelo, which has a distribution relationship with Constellation Brands (NYSE:STZ). The wide and confusing array of joint ventures and other commingled relationships in the beer space demonstrate it is a mature industry that is increasingly being driven by scale. This is used to increase production volume and distribution scale, which serves to help boost profits in the face of slow sales growth.

Anheuser-Busch is among the largest brewers in the world and sells a product that is relatively recession resistant. Both characteristics provide investors a high degree of downside protection. Unfortunately, the stocks strong recent run has pushed the forward P/E to about 14. At this valuation, Anheuser-Busch could end up disappointing investors because many years of double-digit cash flow growth are already built into the stock price. For additional reading, check out 5 Must-Have Metrics For Value Investors.

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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

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