Anheuser-Busch: Toast of the Town
Rising costs of agricultural ingredients continue to erode BUD's profit margins.
"Well you've heard about love givin' sight to the blind
My baby's lovin' cause the sun to shine
She's my sweet little thing, she's my pride and joy
She's my sweet little baby, I'm her little lover boy"
--Pride And Joy - Stevie Ray Vaughan
I was fortunate enough to see Stevie Ray live a number of times. It is hard to believe he has been gone for 17 years. In 2003, Rolling Stone magazine ranked him number 7 on its list of the 100 Greatest Guitarists of All Time ahead of the likes of Jimmy Page and Keith Richards. Stevie Ray would say his brother Jimmie was one of the biggest musical influences he had as a kid, along with his parents who were avid music fans. Aside from his incredible talents, I always admired SRV for his strong sense of family and staying true to his roots. The guy had awe inspiring ability but he was grounded and humble.
Yesterday, I had the opportunity to go and visit the Yuengling Brewery in Pottsville Pennsylvania. Upon arrival, I was immediately greeted by Dick Yuengling, Jr. the great great grandson of David G. Yuengling who founded the brewery in 1829. Listen to Dick Yuengling's words:
"I always knew that there was something different about this brewery. Even at 15 years-old, packaging bottles during my summer vacation, I could feel it - the family heritage, the flavorful traditions and, of course, the everlasting spirit. I knew it then, and I am proud to be part of it now. Yuengling is America's Oldest Brewery and we value that achievement each and every day."
It was a fantastic day for me. The headquarters in Pottsville is part brewery and part museum, and the history surrounds you at every turn. Mr. Yuengling's sense of gratitude and responsibility to his forefathers was heartwarming. There have been many opportunities at any point during the 178 years for the Yuenglings to sell their business or during the hard times of prohibition and the great depression to simply shut things down. But 5 generations of the family have not only endured, but prospered and I left Pottsville with a real sense of history and a genuine and deep respect for all of the folks I met at Yuengling. Although I have never been a huge beer drinker, I can honestly say that my patronage for "cold ones" going forward will be towards Yuengling products.
But of course, I still would like to provide actionable ideas on the investment front. Anheuser-Busch Companies Inc. (BUD) has experienced a volatile year. Starting the year around $48, BUD has seen a negligible rise in the price of their stock as we currently find ourselves around the $50.00 level. But the route taken to $50 has been circuitous to say the least. Growth in the United States has been disappointing, and the rising costs of agricultural ingredients continue to erode profit margins. Not all is grim however, and hope lies in a couple of areas.
BUD reported its 3rd quarter on October 24th. In that report, BUD announced that although revenue for their U.S. beer segment rose a paltry 2% during the quarter, revenue from international markets jumped a healthy 8%. This growth was led by the contributions of Grupo Modelo. And although the pricing environment has been difficult over the last several months for the likes of BUD, the landscape may be turning back in the favor of the brewers as grain prices stabilize and pricing power for the brewers await in 2008. Remember, although the growth they are seeing internationally is very encouraging, BUD still controls about 49% of U.S. market share. That fact, coupled with its renewed focus on trimming costs and increasing productivity bodes well for Anheuser-Busch as we head into the new year. On top of that, the planned joint venture between Molson Coors (TAP) and SABMiller (SAP.LN) could create enough short term logistical problems for the two to provide BUD with a window of opportunity to further gain market share and increase margins.
On the valuation front, at 18.50 times trailing and 16.50 times forward earnings, BUD is at the lower end of the scale for them on a historical basis. When compared to TAP which trades at 22.50 times trailing and 17 times forward earnings and Boston Beer Company Inc. (SAM) which trades at 29 times trailing and 21.00 times forward earnings, BUD is also less expensive then its peers.
There is no doubt that 2007 was a trying year at Anheuser-Busch, but the headwinds that plagued them during the year seem to be subsiding and I think we can see some nice tailwinds as we head into 2008.
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