The Other Busch Family Wound: BUD's New Debt-Loving Ownership

| About: Anheuser-Busch InBev (BUD)

Anheuser-Busch InBev (NYSE:BUD) has been on our minds, albeit not for any brilliant strokes by the company’s Belgian owners. August Busch IV, CEO of Anheuser before he was forced to sell the St. Louis brewery just over two years ago, found his girlfriend, aspiring model Adrienne Martin, unconscious in his home on Dec. 19. It’s believed that Martin died of a heart condition exacerbated by prescription medication. Busch, who has struggled with depression in the past, has given just one interview since the incident, but it’s clear he’s heartbroken — over not just Martin’s death but also the Anheuser sale.

We feel your pain, Augie.

Investors piled into Anheuser stock after it merged with InBev.

Anheuser’s admirers talk about cost cutting and brand strength — a remarkable collection of beers: Budweiser, Beck’s and Stella Artois are the international names: regionals like Bud Light in the U.S., Labatt in Canada and Hoegaarden in Flanders. (That’s an area of Belgium, not a character on The Simpsons.) Combine steady sales from those names with savings from the elimination of costs in St. Louis, where Busch managers were known for spending lavishly, and BUD’s bulls see a stream of ever-growing earnings per share ahead.

Perhaps. BUD earned an estimated $3.14 a share last year. It’s expected to earn $3.77 a share in 2011. At a recent $56, BUD shares trade at around 18 times the 2010 estimate and 21 times trailing EPS.

Not as cheap as Molson Coors (NYSE:TAP), which missed earnings repeatedly and now trades at 10.9 times trailing EPS.

Nor as cheap as U.S. wine and beer giant Constellation Brands (NYSE:STZ).

Yet BUD looks like a bargain compared to a Boston Beer Co. (NYSE:SAM) — the Southwest Airlines of this sector – which brews the beloved Sam Adams line. Its shares are trading at 28.5 times trailing EPS.

So, BUD’s defender’s say, for predictable earnings, long-term growth and sober management, bet on the bigger company. Molson Coors and Constellation, they warn, are cheap but unpredictable. Boston Beer, though fast-growing, is wildly expensive.

Wrong. Budweiser is far more expensive than Boston Beer. How so? Think debt.

The big brewers carry debt-to-enterprise values of 39% (Molson Coors), 47% (Anheuser) and 57% (Constellation). Boston’s Jim Koch, meanwhile, inherited a Depression-era attitude towards debt. His liabilities (minus cash and equivalents) are just 11% of his company’s enterprise value.

The enormous differences in debt levels make the comparison between price-earnings ratios not so meaningful. Better to turn to enterprise multiple — enterprise value divided by 12-month trailing operating profits (earnings before interest, taxes, depreciation and amortization).

Anheuser’s enterprise multiple is far higher: 16 times versus 12 for Boston Beer. (Molson’s enterprise multiple is 14; Constellation’s 23.)

And there you have your red flag.

Growing companies like Boston Beer rarely trade at lower enterprise multiples than their slow-growth peers. Such gaps tend to be short-lived. Over time Boston’s enterprise multiple will come into line with Anheuser’s. But will they converge on a ratio of 12 or 16? For Anheuser’s enterprise multiple to correct to 12, its stock price would have to fall roughly 45%. For Boston Beer’s enterprise multiple to rise to 16, its share price would have to leap to 38%.

What’s more likely? The first, probably. Most stocks in the S&P 500 are cheaper than Anheuser’s, so it’s vulnerable. If Bud misses earnings, investors will punish it the way they did Molson.

No stomach for BUD? We’re with you.

Disclosure: No position