Street Patrol
Recent articles:
• Weak growth muddies Amazon's prospects, 10/26/2005
• Google's got $400 in its sights, 10/20/2005
• General Motors' big scam, 10/19/2005
More...
| | Street Patrol
Investors get no buzz from Bud
Consumers turn to wine, liquor. Competitors nibble at the Anheuser-Busch's market share. Be warned: There's more pain on tap for the beer king.
By Robert Walberg
Changing tastes and a price war have put Anheuser-Busch's profits on ice.
Just look at the company's third-quarter earnings, released Wednesday. Anheuser-Busch's (BUD, news, msgs), the largest U.S. brewer, posted net income of $518 million, or 66 cents a share, on sales of $4.09 billion. Excluding one-time charges, the gain was 78 cents a share, two cents below the Street estimate and 11% below last years gain.
As if those numbers werent depressing enough, the company estimated its full-year earnings per share would be $2.42 to $2.45 a share, short of the consensus analyst estimate of $2.55 a share. So Wednesdays 1.7% decline in Bud's shares -- and what I think will be several more months of pain for shareholders -- should come as no surprise.
Consumers popping corks, not pulling tabs
Neither should Bud's wider problems. Consumer tastes have shifted away from beer toward wine, gin, rum and vodka. According to the Adams Beverage Group, a market research firm, the consumption of alcohol dedicated to beer during the seven-year period ranging from1998 through 2004 fell to 58.1% from 59.6%. Whether the decline is a result of the more mature tastes of baby boomers or the difficult economic conditions faced by lower-income consumers, the fact remains that Budweisers market is getting smaller.
More from MSN Money
Its share of that market is shrinking, too. The company announced that for the first nine months of the year it owned a 49% share versus a 50% share last year. In order to fight the downtrend in demand and to maintain as much share as possible, Anheuser-Busch has been aggressive in discounting prices on numerous brands.
The decision to engage its competitors in a price war to regain market share is the principle reason for the companys declining margins and profitability. Anheuser-Busch has announced that it plans to increase prices in early 2006. But that raises this question: Will the company keep its prices higher if the rest of the market doesnt go along, or if demand falls off?
Barring a better pricing climate, its tough to see the company digging out of its current hole. Though international volume grew by 7.5% -- not including the benefit of its Harbin Brewery acquisition -- international sales still account for less than 20% of total Anheuser-Busch-branded sales. Without a pickup in domestic sales, the company will do well to tread water.
Stuck with suds
There is some hope for a better 2006, however. First, the company will face a lower comparison bar, thanks to this year's poor results. Second, the company is rolling out Tilt, a new malted beverage featuring an assorted blend of caffeine, guarana, and ginseng. I doubt Tilt will make a big difference in the companies' overall sales, but it does show Bud's commitment to innovation. Third, the price hikes could boost margins and profits. And finally, third quarter sales were hurt by reduced volume in the wake of Hurricane Katrina -- an event that, hopefully, wont occur again.
Unfortunately, one resource not open to Anheuser-Busch at the moment is diversification through a major acquisition, as the company already is saddled with a boatload of debt. Bud will have to ride out this downturn on the Clydesdale it rode in on -- beer.
Investors should not be fooled into thinking that the stock is cheap merely because it is trading at its lowest price since late 2001. Until investors are convinced that the pricing climate has improved, and that beer consumption overall has stabilized or turned higher, earnings estimates will continue to be adjusted lower and Anheuser-Buschs stock will continue to trade at a material discount to the market.
If you want to enjoy any kind of a buzz from Anheuser-Busch, buy a few cold Buds and leave the stock alone.
At the time of publication, Robert Walberg did not own or control shares of companies mentioned in this column.
|
