Profitability is one of the main factors to look at when analyzing a company. It's not only the reason behind a company's existence, but also a key element when determining whether to invest in a company or not. Thus, in this article I will look into Anheuser-Busch Inbev SA ADR (NYSE:BUD)'s earnings growth, profit margins, profitability ratios and cash flow, in addition to evaluating which investment gurus bought the stock in the recent quarters.
As the world's largest brewer, this company has earned its success its profitable business mix of beer brands in several key markets. In fact, the firm has a majority market share in Brazil (69%), Argentina (77%), Canada (41%), Belgium (57%), Ukraine (36%), and the U.S. (48%), thanks to its ownership in Latin America and Canada's leading brewer, Ambev SA (ADR) (NYSE:ABEV), and lucrative distribution deals. Furthermore, the company's expansion was complimented in 2013 via the remaining stake acquisition in Modelo, which will increase the existing brand portfolio.
Also, the firm's low-cost packaging alternative of 630-milliliter and 1-liter returnable glass bottles, in addition to its vast distribution system of 1 million sales points, give this brewer a strong competitive advantage over its industry peers. Moreover, its top brand ownership and global sales figures have earned the firm a wide economic moat, making it an interesting investment opportunity. So, let's look at Anheuser-Busch's profitability metrics and determine whether this brewer is a winner.
When looking back through the history of the stock market, there is a recurring theme among those stocks which have had some of the strongest price appreciation, and it's related to their earnings growth. If you plot a chart of earnings growth versus a company's stock price there is a usually a strong relationship between the two. So, the first step in analyzing Anheuser-Busch is evaluating its earnings potential.
The company generated 29% EPS growth last quarter compared to the same quarter in the past year, which is a very strong growth rate. The EPS growth is due to strong management execution and increased product adoption levels, and management sounded very optimistic in the last earnings call. It's important to highlight that analysts just upgraded their estimates for the current year, increasing projected EPS to 82.25%. In addition, Anheuser-Busch generated 3 year average annual EPS growth of 15.34%, which is very encouraging.
Let's analyze Anheuser-Busch's revenue growth now. I want to point out that it's important that both EPS and sales grow at similar levels. The company reported a 14% quarterly revenue growth y/y, which could be better, since the best growth opportunities come from companies that generate more than 15% quarterly revenue growth before the stock price enters a solid uptrend.
In addition, the company shows a 3 year annual sales growth rate of 2.65%, which is relatively low. It is crucial to keep track of the company's current quarterly sales and EPS in order to find out if this trend has been reverted.
Gross Profit Margin
The gross profit margin measures a company's manufacturing and distribution efficiency during the production process, in addition to telling investors the percentage of revenue/sales left after subtracting the cost of the goods/services sold. A company that operates on a higher profit margin than its competitors is more efficient and will usually attract more investors.
In Anheuser-Busch's case, its gross margins have increased over the past years. The 5-year low for the gross margin was reported with at 53.2%, while the current margin of 58.6% is the 5-year high point. Moreover, this TTM gross profit margin of 58.5% is above the 5-year average of 54.94%, which I find very positive since it shows that management has been successful in making manufacturing and distribution during the production process more efficient over the past 5 years.
Operating Margin = Operating Income / Total Sales
The operating margin reflects the proportion of a company's revenue that is left over after paying for variable costs of production, such as wages, raw materials, etc. A healthy operating margin is required for a company to be able to pay for its fixed costs, such as interest on debt. If a company's margin is increasing, it is earning more per dollar of sales, therefore, the larger the margin, the better.
Over the past 5 years, the Anheuser-Busch's operating margin has been increasing. In 2009, the company reported an operating margin of 22.7%, but over the past twelve months the margin spiked at 31.8%, clearly above the 5-year average of 29.5%. This implies that there has been an increase in the percentage of the total sales left over after paying for variable costs of production, compared to the 5-year average.
Net Profit Margin = Net Income / Total Sales
This ratio measures how much out of every dollar of sales a company actually keeps in earnings. The profit margin is a very useful metric when comparing companies in the same -or similar- industries, as those with a higher net margin are usually more profitable, having better control over its costs compared to its competitors.
The brewery's net profit margin showed a strong decrease, when compared to the 5 year average. The TTM net profit margin of 2.10%, for example, is well below the 5-year average of 65.06%, implying a decline in the percentage of earnings that the company is able to keep compared to its 5-year average. I think it's crucial to look for stocks with current net profit margins above the five year average margin.
Free Cash Flow = Operating Cash Flow - Capital Expenditure
A measure of financial performance calculated as operating cash flow minus capital expenditures, free cash flow ((NYSE:FCF)) represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. Free cash flow is important because it allows a company to pursue opportunities that enhance shareholder value. Moreover, without cash it's tough to develop new products, make acquisitions, pay dividends and reduce debt.
Anheuser-Busch generated a ratio of cash flow from operations/total sales of $8.9 billion, declining from the previous year's report of $10 billion. And although this could be worrisome to investors, the 5 year comparison shows that the firm has been able to maintain certain stability in its free cash flow, making 2012 merely an unusually strong year.
It is important to check which hedge funds bought the stock in the last quarter and at what price they did so. I assume that if a prominent institutional investor put money into Anheuser-Busch, its stock will pass strict fundamental standards. Thus, I feel encouraged by the fact that investment gurus Tom Russo and Steven Cohen bought the stock in the past months at an average price of $95.01, because it reflects their confidence in future profitability.
Currently, many analysts have a good outlook for Anheuser-Busch. While MSN money is predicting that the brewer will retrieve an increasing EPS of $6.00 for FY 2014, Bloomberg's analysts estimate revenue to increase from 2013's $47.56B million to $50.59B million for FY 2014.
All in all, Anheuser-Busch is an investment worthy company, with profitable long-term growth prospects. Also, the company has made a point of taking care of its shareholders, via a 2.5% dividend yield and solid returns on invested capital. The booming EPS growth, combined with increasing operating margins, is also a very attractive factor in favor of this company. And to close off the analysis, I'd like to remind investors that the stock's current trading price of 12.9x trailing earnings is well below the industry average of 19.2x, making this an ideal time to buy the brewers shares at a bargain price.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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