Brewing Up Some Interest in Anheuser-Busch

My look at PepsiCo (NYSE: PEP) made me thirsty for more information on beverages. But this time, we'll turn to brewers, specifically Anheuser-Busch InBev (NYSE: BUD), the largest beer producer worldwide, with a portfolio of more than 200 brands distributed in 120 countries.

Alcohol is relatively recession-proof. And even though sales can slow because of high unemployment, we should see a much more "business as usual" performance, despite the soft global economy.

North America represents less than half of BUD's business (by volume, revenue, and profit) -- a plus for global exposure, especially in growth markets. As revenues from North America pulled back during the latest quarter, increased demand in other parts of the globe led to an overall 8.1 percent growth compared to the same quarter last year.

Even more globally diverse than BUD is SABMiller (OP: SBMRF), the world's second-biggest brewer. It has astonishingly evenly spread revenues across the five continents it serves, and it just announced plans to start construction of a brewery in northern Namibia. The missing inhabited continent is Australia, where the company hopes to expand through the acquisition of Fosters Group Ltd. (OP: FBRWF). But the deal seems to be on hold after the rejection of an initial offer in June.

The problem with expanding operations in this type of first world country is that the market isn't growing. SABMiller's acquisition focus seems to be on the wrong type of business growth.

The two areas with much better growth prospects are emerging markets, especially Latin America, and craft or microbrews. Boston Beer Co.(NYSE: SAM) is the largest craft brewer, but it is almost 100 percent exposed to the US market. I favor BUD's approach in this area. The company is ramping up operations in developing nations and acquiring interests in domestic microbreweries. The latter allows the breweries to stay locally owned while gaining access to BUD's extensive resources.

BUD recently purchased 58 percent of Chicago-based Goose Island, the majority of it from Craft Brewers Alliance Inc. (NASDAQ: HOOK), in which it also has a 32 percent stake. Craft Brewers Alliance includes popular microbreweries in Oregon (Widmer), Washington (Red Hook), and Hawaii (Kona). Full disclosure: Widmer, based in Portland, Oregon (my hometown and the microbrew capital of the world), brews a hefeweizen that happens to be my favorite beverage.

This discussion wouldn't be complete without a look at Molson Coors Brewing Co. (NYSE: TAP), which is trading at its book value, with a PEG ratio of about 1. At first glance, this appears to be a great value opportunity, but dismal growth prospects (which are present only in Canada, the US, and the UK) and shrinking sales numbers vaporize that thought.

Just yesterday, the company reported a 5.7 percent increase in net sales for the second quarter. But it also reported a 5.7 percent decrease in net income from continuing operations and a 1.2 percent decrease in underlying after-tax income. Molson Coors president and chief executive officer Peter Swinburn said, "Positive beer pricing, cost reductions in our core businesses, and favorable foreign exchange were offset by the impact of continuing weak economic conditions, commodity inflation, and investments in our international business."

A cross-section of the industry shows BUD stacks up well against its comparables for many categories, including its PEG ratio, which I was surprised to see. A strong cash position, especially relative to SABMiller, tremendously increases its acquisition prowess, which can propel the next stages of growth.

Conducting my own valuation of BUD, I looked to the conservative side of growth (13 percent to 15.5 percent) and free cash flow margin (13 percent to 21 percent), which resulted in a price target range of $63 to $75.54. The least exciting piece of the BUD puzzle is the substantial amount of debt on its books ($44 billion), but at a time when interest is cheap (with a lower rate than Spain or Greece) and liquid cash is at a premium, I can't justify paying it down.

Looking ahead, I expect BUD to outperform the major players by a material margin. With a focus on expanding in developing markets and profit-sharing with the premium-priced microbrews, BUD is setting itself up for success.