- BUD's huge debt load caused me to stay away in the past.
- After a massive buyout, it is hard to determine the fair value of a company.
- Increasing revenues and earnings make BUD's debt load more easily serviceable and provides flexibility going forward.
Growing up in St. Louis, as I did, the one company everybody knows about is Anheuser-Busch Inbev (NYSE:BUD). If you walked into a party with a case of Coors (or God forbid Miller), you were going to get some raised eyebrows. Some of that loyalty has started to fade now that the company is no longer owned by the Busch family (AB could be a case study in the dangers of nepotism in business), but most St. Louisans still wouldn't be caught dead with a SABMiller or Molson Coors product.
The beer business is probably the easiest business to understand in the world. Mix water, barley, hops and varying amounts, add yeast, bottle it, then sell it to a distributor (I'm oversimplifying here, but the point is BUD has a business model you could easily explain to a third grader). Ok so we've got a business that is easy to understand, that I've known about my whole life, and that sells a product that has had strong demand since the time of the Pharaohs in ancient Egypt. So why have I never owned any until now?
Following the InBev takeover in 2008, Anheuser-Busch became a foreign owned company (you have no idea how much it pains me to write that, even to this day). As a foreign company AB-InBev does not have to issue 10-Qs or 10-Ks, which made it slightly more difficult to get accurate financial information. Even today, you will get different revenue and earning numbers depending on where you look. On top of that, it generally takes a couple years after such a massive merger for the dust to settle enough to get a clear picture of the company's future. At the time of the merger, the combined companies had $36 billion in revenues. Following the buyout, Anheuser-Busch struggled through the great recession, despite being in one of the most recession-proof businesses that exists. It was weighed down by the $44 billion of debt it took on to complete the buyout and was hampered by the deep cost cutting it was forced to do in order to make the interest payments on the debt. Fast forward five years later to 2012, where AB-Inbev made just shy of $40 billion in revenues, good for just above 2% annual revenue growth. Not exactly good news when you are leveraged to the hilt and paying over $4 billion in interest payments. The good news is after taking nearly 5 years to grow revenue 10% from pre-merger levels, last year alone BUD was able to grow revenues nearly 10% to just over $43 billion.
The enormous debt load was really the main factor holding me back from purchasing BUD. When a company is paying over 10% of revenue in interest alone, the situation can get really ugly, really fast. Thankfully beer is a high-margin product and Anheuser-Busch has been able to earn its way out from under the enormous debt burden. Interest expense was down to $3 billion last year thanks to lower interest rates, though total debt still sits at a hefty $49 billion, with close to $13 billion coming due in the next two years. On a side note, with such a high percentage of debt coming due within the next two years, I find it highly unlikely Anheuser-Busch will be pursuing a merger with SABMiller. Tim McAleenan goes into more detail on that here.
So right now you're saying AB-InBev is still a foreign company and still has a huge debt load, so what's changed? The earnings.
Taking out a $6.4 billion fair value adjustment in 2013, net income increased from $5.7 billion in 2011 to $7.9 billion in 2013 and EPS has risen from $3.58 to $4.94, an almost 40% increase. Thanks to the stronger earnings, BUD is able to be more flexible with the amount of debt they pay down and will be able to get lower rates for what they decide to refinance. The management team sees this and is clearly confident that strong earnings growth will continue, as in 2013 it doubled the cash distributions to shareholders from $3.6 billion to $6.2 billion. This confidence, along with continued revenue and earnings growth, is why I finally pulled the trigger and bought myself some BUD. Let the good times roll!