Who Fancies a BUD?

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Beer. Although some would not like to admit it, it is a staple of modern day life. This kind of product has a certain defensive quality about it; unless there is a huge overnight change in perceptions, beer sales and their growth will rise in line with global population growth. The case for investment in the industry is simple--it is a fairly stable industry, and last year beer sales rose last year for the 27th year in a row.

So then should we consider investing in one of the world's largest brewers - Anheuser-Busch InBev (NYSE: BUD)?

World Beer Rankings

<table> <tbody> <tr> <td> <p><strong><span>Rank</span></strong></p> </td> <td> <p><strong><span>Brand</span></strong></p> </td> <td> <p><strong><span>Main market</span></strong></p> </td> <td> <p><strong><span>2010-2011 growth</span></strong></p> </td> <td> <p><strong><span>Owner</span></strong></p> </td> </tr> <tr> <td> <p><strong>1</strong></p> </td> <td> <p>Snow</p> </td> <td> <p><strong>China</strong></p> </td> <td> <p><strong>-2.36%</strong></p> </td> <td> <p><strong>SABMiller <span class="ticker" data-id="214889">(NASDAQOTH: <a href="http://caps.fool.com/Ticker/SBMRY.aspx">SBMRY</a>)</span></strong></p> </td> </tr> <tr> <td> <p><strong>2</strong></p> </td> <td> <p>BUD Light</p> </td> <td> <p><strong>USA</strong></p> </td> <td> <p><strong>-4.4%</strong></p> </td> <td> <p><strong>AB InBEV</strong></p> </td> </tr> <tr> <td> <p><strong>3</strong></p> </td> <td> <p>Budwiser</p> </td> <td> <p><strong>Worldwide</strong></p> </td> <td> <p><strong>4.5%</strong></p> </td> <td> <p><strong>AB InBev</strong></p> </td> </tr> <tr> <td> <p><strong>4</strong></p> </td> <td> <p>Corona Extra</p> </td> <td> <p><strong>Worldwide</strong></p> </td> <td> <p><strong>9%</strong></p> </td> <td> <p><strong>AB InBev</strong></p> </td> </tr> <tr> <td> <p><strong>5</strong></p> </td> <td> <p>Skol</p> </td> <td> <p><strong>Africa</strong></p> </td> <td> <p><strong>-2.3%</strong></p> </td> <td> <p><strong>Carlsberg Breweries</strong></p> </td> </tr> <tr> <td> <p><strong>6</strong></p> </td> <td> <p>Heineken</p> </td> <td> <p><strong>Worldwide</strong></p> </td> <td> <p><strong>4.8%</strong></p> </td> <td> <p><strong>Heineken International </strong></p> </td> </tr> <tr> <td> <p><strong>7</strong></p> </td> <td> <p>Coors Light</p> </td> <td> <p><strong>UK/US</strong></p> </td> <td> <p><strong>25%</strong></p> </td> <td> <p><strong>Molson Coors <span class="ticker" data-id="206318">(NYSE: <a href="http://caps.fool.com/Ticker/TAP.aspx">TAP</a>)</span></strong></p> </td> </tr> <tr> <td> <p><strong>8</strong></p> </td> <td> <p>Miller Light</p> </td> <td> <p><strong>US</strong></p> </td> <td> <p><strong>-1.1%</strong></p> </td> <td> <p><strong>SABMiller</strong></p> </td> </tr> <tr> <td> <p><strong>9</strong></p> </td> <td> <p>Brahma</p> </td> <td> <p><strong>South America</strong></p> </td> <td> <p><strong>-3.4%</strong></p> </td> <td> <p><strong>AB InBev</strong></p> </td> </tr> <tr> <td> <p><strong>10</strong></p> </td> <td> <p>Asahi Super Dry</p> </td> <td> <p><strong>Japan</strong></p> </td> <td> <p><strong>2.5%</strong></p> </td> <td> <p><strong>Asahi</strong></p> </td> </tr> <tr> <td colspan="2"> <p> </p> </td> <td> <p><strong>Total top 10 Growth</strong></p> </td> <td> <p><strong>32.24%</strong></p> </td> <td> <p> </p> </td> </tr> </tbody> </table>

Source: http://www.thedrinksbusiness.com

As we can see, ABInBev produce some of the best-selling beers in the world. Anheuser-Busch also produce:

  • 3 ‘Global brands’ – Stella Artois, Becks, Budwiser
  • 2 ‘Multi-country brands’ – Leffe, Hoegaarden
  • 200 + Local Champions

What about the company's finanicals?

<img src="/media/images/user_14485/abinbev-vs-indusrty-margins_1_large.jpg" />

 Data Source: Motley Fool CAPS

ABInBev generates a very respectable gross margin of 65.5% and a pre-tax profit margin of 25.5%. This gives the company plenty of free cash flow, which it can use to return cash to shareholders or re-invest into the business.

However, this margin could come under pressure from increasing commodity prices.

 

<img src="/media/images/user_14485/abinbev-vs-indusrty-eps-growth_1_large.jpg" />

 Data Source: Motley Fool CAPS

ABInBev's growth strategy has been aggressive. It has been driven through acquisitions and aggressive pricing by the firm. This has led to a large increase in sales, but slow growth in EPS. (Although these figures are somewhat distorted by abnormally low growth in, Q4 2010 and Q1 2011).  ABInBev is effectively buying market share from its competitors.

If we look at 3 year growth on a company level we get a much better growth picture:

<table> <tbody> <tr> <td> <p><strong> </strong></p> </td> <td> <p><strong>ABInBev</strong></p> </td> <td> <p><strong>SABMiller </strong></p> </td> <td> <p><strong>Heineken NV</strong></p> </td> <td> <p><strong>Molson Coors</strong></p> </td> </tr> <tr> <td> <p><strong>Revenue - 3 Yr Growth Rate</strong></p> </td> <td> <p><strong>7.00%</strong></p> </td> <td> <p><strong> 21%</strong></p> </td> <td> <p><strong>16.5%</strong></p> </td> <td> <p><strong> 7.45%</strong></p> </td> </tr> <tr> <td> <p><strong>EPS - 3 Yr Growth Rate</strong></p> </td> <td> <p><strong>18.43%</strong></p> </td> <td> <p><strong> 33%</strong></p> </td> <td> <p><strong>25%</strong></p> </td> <td> <p><strong>-4.22%</strong></p> </td> </tr> <tr> <td> <p><strong>Dividend - 3 Yr Growth Rate</strong></p> </td> <td> <p><strong> 235.90%</strong></p> </td> <td> <p><strong> 34%</strong></p> </td> <td> <p><strong>25%</strong></p> </td> <td> <p><strong>11.82%</strong></p> </td> </tr> <tr> <td> <p><strong>Dividend Cover 2011</strong></p> </td> <td> <p><strong> 3.5</strong></p> </td> <td> <p><strong> 2.4</strong></p> </td> <td> <p><strong>3.2</strong></p> </td> <td> <p><strong>3</strong></p> </td> </tr> </tbody> </table>

 Data Source: Motley Fool CAPS

This data presents an interesting picture of BUD versus its competitors. Although BUD has the slowest revenue growth amongst its US-listed competitors, it has a EPS growth rate that is slightly better (second in the group). BUD has the highest dividend growth in the group, with the highest dividend cover, leaving plenty of room for extra dividend growth and plenty of free cash flow.

So in conclusion, ABInBev looks to be a decent investment. It products are some of the most popular in the world. However, its revenue figures are lacking behind its competitors as it seeks to drive sales volumes through lower prices. I believe BUD will continue to improve investor returns, with its vast portfolio of products.

With all these factors in mind i think ABInvBev is a good investment for the long and short term. Although if you are looking for more growth, both SABMiller (NASDAQOTH: SBMRY) and Heineken NV (NASDAQOTH: HEINY)  could be better stocks.


RupertHargreav has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Molson Coors Brewing Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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