Why Isn't There A Bigger Head On Busch?

It had to happen: a stock tied to the growing popularity of low-carb, Atkins diets. But who figured on Anheuser-Busch (BUD )? In a land of dieters, the world's leading brewer has a hit on its hands with microcarb Michelob Ultra. Check it out by visiting lowcarbdietworld.com, scrolling past the bikini model, and clicking to low-carb menus and drinks. There stands Michelob Ultra and its 2.6 grams of carbohydrates per bottle, one-fourth as many as in a regular Budweiser. After just a year, Mich Ultra is taking 2.5% of U.S. supermarket beer sales. Some is coming out of other Busch labels, notably top-selling Bud Light. Yet Mich Ultra typically costs 18% more than Budweiser brews, so the trading-up is aiding Busch's profits: Earnings per share grew 12.8% in 2003's first nine months.

Despite the healthy profit gains and a bullish change in Busch's dividend policy, the stock is about where it started in 2003, under $50 a share (charts). Sure, Michelob Ultra's second year on the market will prove tougher, if only because Miller Lite (3.2 grams) and other brews are counterattacking on the low-carb front. Just the same, investors seem to be bypassing Busch's low-risk returns in hopes of a tech or telecom pig-out. For example, both Busch and AT&T Wireless Services (AWE ) reported profits on Oct. 22. In the 48 hours around their announcements, AT&T Wireless drew 577 posts at the Yahoo! (YHOO ) finance message boards; Busch inspired just 26.

YET WHAT BUSCH is saying about the future shouldn't be ignored. Last year it netted $1.9 billion, or $2.20 a share, on sales of $13.6 billion. This year earnings should reach $2.48 to $2.50 a share. A key reason is Busch's demonstrated ability to raise prices while still capturing market share. W. Randolph Baker, Busch's chief financial officer, says imports have raised such a high umbrella over prices -- Heineken typically sells at 65% more than Bud -- that consumers haven't flinched much at higher prices on domestic labels.

Busch also has benefited greatly from a 50% stake in Mexico's dominant brewer, Grupo Modelo, which is its major source of income from outside investments. Last year, that amount jumped 38%, to $352 million. With a slack Mexican economy, Modelo's contribution to net this year is about flat. Yet Baker sees Mexico's younger and faster-growing population producing long-term average profit growth for Modelo of more than 12% a year. He also expects meaningful profits from sales in China of Budweiser, along with middle- and lower-end beers from Tsingtao Brewery, in which Busch has a 9.9% stake that it plans to build up to 27%.

Overall, Busch figures it can deliver a minimum of 10% growth in per-share net each year. In addition, Busch is now boosting its annual dividend at a rate equivalent to each year's profit growth. For instance, in July it raised the payout to 88 cents a year, a 12.8% increase that's in line with 2003 profit growth. Next year, Busch expects earnings per share to increase 12%. Nothing goes in a straight line, naturally, but suppose Busch's earnings grew at the low end of its forecast, or 10% a year. Figure, too, that the market in Busch shares remains tepid, and so Busch's profit increases only translate into 8% annual average gains in the stock price. What do you wind up with in, say, five years? A $72 stock, plus aggregate dividends of $5.37, or a total return of 58%. Low-carb stocks: investing with less risk of post-pig-out self-loathing.

By Robert Barker

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