A Buy and Hold Stock for Patient Investors
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Anheuser-Busch (NYSE: BUD) is the world's largest brewery. It produces, distributes, and markets over 200 different brews. In 2011, about 40% of its sales were in North America, 36% were in Latin and South America, and the balance in Europe and Asia. It produces a majority of the ten largest beer brands in the world, under names like Budweiser, Beck's and Stella Artois.
It has been a busy summer for the company. Aided by positive currency adjustments due to the beleaguered Euro, Anheuser-Busch's earnings jumped 37% to $1.96 billion, or $1.23 per share, from the second quarter of 2011's total of $1.45 billion, or $0.90 per share. Revenues in the second quarter were about four percent above the year ago quarter, at $9.95 billion, versus $9.87 billion a year earlier. This gain was despite less than a one percent gain in actual volume shipped. The increased profit came largely on the heels of a reduction of some $650 million in financing costs.
Core North American results dragged down company numbers. Marketing costs on brand extensions within the Budweiser family, along with a 2% drop in actual volumes, completely overwhelmed growth in Brazil, China, and other developing economies.
Earlier in the second quarter, Anheuser-Busch agreed to acquire the half of Groupo Modello that Anheuser-Busch did not already own for $20.1 billion. To help with anticipated antitrust woes, the combined companies agreed to sell its 50% interest in Crown Imports to Constellation Beverages (NYSE: STZ), giving that company full control over the importer of Modello's beer, such as Corona, into the United States.
Anheuser-Busch plans to use some cash and a lot of debt to finance the purchase. It has already scheduled bond sales of over $7.5 billion, and plans to issue another $7 billion in the near future. The tremendously low interest rates available to Anheuser-Busch will make the merger accretive almost immediately, even before the estimated $600 million of annual cost savings from the deal.
The pending $14 billion Anheuser-Busch bond debt issuance, when combined with Nestle's (NSRGY) buyout of Pfizer's (PFE) baby food unit signals some life in a previously moribund capital market. All told, there is anticipated to be more debt issuance this year than any year since 2008, which is good news for the investment bankers of the world.
Management believes that revenue growth will pick up in the last half of this year, as those brand extensions gain favor. Over the longer run, the Mexican economy promises more growth than the domestic economy, and Anheuser-Busch has eyes on Chinese growth as well. Its debt level will be high by its own standards for a few years, and the stock has had a great run, up about 60% from August 10th of last year, leaving it with a 5 year PEG of 1.27. I believe the stock price has gotten ahead of a fair valuation, but Anheuser-Busch is a premier global company, and I don't believe there is ever a bad time to buy a premier company. Patient, buy and hold investors would do well to look closely at Anheuser-Busch.
Constellation will benefit greatly by being the sole owner of Crown Imports. Corona is the fastest growing beer in America, having grown at an average 8.3% annual rate in the last 10 years to become the fifth leading beer brand in America. Constellation also recently acquired the Mark West winery and trademarks. The company is wine based, and neither beer nor spirits are a significant part of its business until at least the Crown Imports deal is completed later this year. The company has also taken on a lot of debt to finance the $1.85 billion acquisition, and that debt will comprise the majority of its capitalization. Constellation’s stock has risen nearly 50% in the past six weeks on the news of the Crown Imports deal. At its current price and corresponding 5 year PEG at 1.5, I would wait for a price pullback before investing in this company.
A fairly new beverage company I have not as yet reported upon is Beam (NYSE: BEAM), as it was formerly a part of Fortune Brands. The company spun off its home security business into the new, Fortune Brands Home and Security (FBHS) in late 2011, and renamed itself Beam after the spinoff. It was hoped that the focus on just one segment, spirits, would make Beam into a more profitable and efficient operation than was possible as a part of a larger conglomerate. So far, returns are positive indeed, but perhaps we should not be too hasty.
Earnings comparisons between 2011 and 2012 will be opaque for Beam due to distortions arising from the Fortune Home Security spinoff. According to Beam's own report, comparable adjusted earnings were up 16% in the second quarter versus a year ago, to $0.58 per share from an adjusted $0.50 per share. Management also boosted its forecast for the year to low double digit gains, from earlier forecasts of high single digit gains. I am looking for earnings of about $2.45 per share this year.
Beam recently spent $605 million to acquire the Pinnacle Vodka and Calico Jack Rum brands from privately held White Rock Distilleries. That demonstrated commitment to leverage its balance sheet for the sake of growth makes some sense as long as growth occurs. Even without the new acquisitions, Beam's revenues in the second quarter increased 4.4% from the year ago, and several of the core brands, including Jim Beam, Makers Mark and Courvoisier saw double digit growth.
Beam is trading at about 25 times this year's earnings, and 20 times what analysts expect in 2013. It has a 5 year PEG of 2.09, suggesting it is rather expensive. I like the company, but with its limited 1.3% yield and its rich valuation, I would pass on this for now.
StockCroc1 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Beam. 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.If you have questions about this post or the Fool’s blog network, click here for information.