Whassup at Anheuser-Busch? Plenty


By Amy Tsao In the beer game, it's really fun only if you're Anheuser-Busch (BUD). Just look at the most recent quarterly results for the world's biggest brewer compared with its two closest competitors, Adolph Coors (RKY) and Philip Morris' (MO) Miller-Brewing Co. Busch posted a 9.6% increase in second-quarter profits year-over-year, while earnings at Coors slipped 5.5% and Miller's profits fell 11.6%. As the top frog (or lizard for that matter), Busch is showing robust profits at a time when investors are desperately looking for stable companies to put their dollars in.

Generally speaking, alcohol stocks make good defensive investments. Slumping economies usually don't cause a drop in beer consumption. After all, people guzzle alcohol, bad economy or not -- and some industry watchers argue that bad times actually increase imbibing.

Still, of the two companies focused primarily on selling beer (Philip Morris, of course, is involved in a number of other businesses), St. Louis-based Busch's stock is up some 5% since this time last year, while Denver-based Coors is off about 25% over the same period. At around $43 per share and with a price-to-earnings ratio of 24, Busch stock is trading at premium to Coors, which at $48 has a p-e of 17.

SIZE MATTERS. Is it too late to get in? Not really. Investors might want to consider paying extra for Busch. The stock could enjoy steady gains if analysts are right that the company will maneuver gracefully through the lackluster economy and vanquish challenges from trendy alcoholic alternatives. The reason: Size matters when it comes to weathering hard times. As a general rule, the bigger the consumer-staples company, the more flexibility it has in adjusting capacity and distribution as needed. Busch, which makes the country's best selling suds, Budweiser and Bud Light, has plenty of flexibility.

"When you're in a strong position like Busch, size insulates you from macroeconomic trends. They have more resources to deal with," says David Kathman, an analyst at Morningstar. "It's harder for smaller companies to manage their way through any kind of tough times." Adds analyst Bill Pecoriello of Bernstein Research, "Busch's scale allows it to manage through good times and bad, delivering earnings consistency."

If the company's results for second quarter are any indication, it appears to be on track to deliver a solid second half. In the quarter ended June 30, Busch posted $524 million in profits, up from $478 million a year ago, on $3.38 billion in sales, which rose 3.5% from 2001. It's forecasting 12% profit growth for 2001, even as volume growth for beer sales is expected to creep up just 1% per year over the next five years, according to Bryan Spillane, an analyst at Banc of America Securities. Spillane thinks the company can pull off 10% annual earnings growth over the next few years.

TALKING LIZARDS. A huge reason for Busch's ability to outshine its rivals is the runaway success of its marketing campaigns. According to a recent BusinessWeek survey, Budweiser is one of the most recognized names in the world, far better known than its competitors (see BW, 8/6/01, "The Best Global Brands"). Recent advertising hits like the talking lizards and the "Whassup?" foursome helped Bud and Bud Light keep their place as the country's top beers by far. The ads' success has also allowed Busch to raise prices on the Buds, even though the economy is in a funk. So far, consumers haven't flinched.

Its international business is also boosting Busch, which is the only brewer of the top three that has significant operations outside the U.S. The company's international beer net income rose 26% in the second quarter, compared to 2000. Operating profits for international beer operations also increased, primarily due to strong volume gains in China and Canada. Aftertax equity income rose $15 million, or 24%, to $78 million, during the quarter, with help from Busch's stake in Mexico's Grupo Modelo.

One of Busch's biggest strengths: The company has many of its distribution channels all to itself. Some 60% of its distributors do business with Busch and Busch only. This is a huge advantage. Think of it as the Wal-Mart of beer companies: Busch is so dominant that its distributors have to bend to its wishes. "Someone as big as Busch can tell its distributors: 'You carry me and just me,'" says Eric Jemetz of New Amsterdam Partners. And that's just what it does. Miller, Coors, and the rest are forced to fight it out for distributors' attention, while Busch sits coolly by.

FORGETTABLE. As Busch inched its share of the U.S. market higher, to 48.1% from 47.7% in the second quarter, Coors and Miller have been nursing their suds on a number of fronts. For Coors, its most important product, Coors Light, which accounts for about 75% of the company's sales, is losing its appeal. Though they're ubiquitous, ads for the beer aren't particularly memorable.

To add to the lost brand cache, alternatives to beer -- like Smirnoff Ice and alcoholic lemonades -- are taking crucial market share away from all three of the brewmeisters. But Miller and Coors have been hit harder than Busch by this trend since the hot new alternatives steal attention away from their biggest products -- light beers.

And the demographics look solid for beer consumption. A increase of consumers in the 21-to-27-year-old age group over the next few years will help offset the effect of aging Baby Boomers, who are expected to opt for more wine instead of brewskies as they get older. But for now, Busch appears to be the only brewer worth raising a glass to. Savvy investors might want to repeat after the frogs: Bud (is) Wise Er. Tsao covers the markets for BusinessWeek Online in New York


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