In Monday’s Stock Blog post “Four Stocks to Watch This Week,” which of the companies discussed posts earnings today?

Constellation Brands (STZ): Hilsenrath says the alcoholic-beverage maker, which reports its earnings this week, is actually “interesting beyond earnings” — “particularly in light of Anheuser-Busch” and other consolidation stories in the industry.

Constellation gets high marks for earnings quality, but the information available from Zacks Research Wizard was insufficient to calculate several of the other models I like to follow.

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The slideshow, “Which Costs More?” (June 10) says Budweiser is pricier than crude oil. How much IS a barrel of beer?

$447.25

As for me, I’m taking the money and running when it comes to Anheuser-Busch (BUD).

Warren Buffett Watch: According to Adolphus Busch IV, how big a stake does Berkshire Hathaway’s CEO hold in Anheuser?

“Mr. Buffett, who holds a 5% stake in Anheuser-Busch has a notable reputation for assisting in matters where family ownership is at stake,” Adolphus Busch IV, August Busch IV’s uncle, said in a statement.

As for me, I’m taking the money and running when it comes to Anheuser-Busch (BUD).

I’d do the same with Anheuser-Busch (BUD). Due to the InBev offer BUD is up 14.3% since my January 10 article, compared to a 4.2% decline in the S&P 500.

Disclosure: At time of publication, William Trent has no financial position in the companies mentioned in this article.

Mark Travis said he likes “redneck stocks.” On April 24, The CIO of Intrepid Capital Funds recommended:

• Comcast (CMCSA)
• Anheuser Busch (BUD)
• Speedway Motorsports (TRK)
• International Speedway (ISCA)

The following is a reprint of my January 25, 2007 RealMoney column.

Hansen Natural (HANS) develops “alternative” soft drinks such as natural sodas, fruit juice drinks and energy drinks. It is best known for its “Monster” brand energy drink, which is the second-most popular brand of energy drink and has helped the company’s shares become one of the best investments of the last decade.

Hansen now has to prove whether, unlike the namesake one-hit-wonder boy band, it can sustain its momentum to new products and markets. We know what John Edwards thinks of leading energy drink Red Bull, and it’s probably not a stretch to think that many others feel similarly about the new concoctions.

Still, that hasn’t stopped the market from growing exponentially for the last several years. The question keeps getting asked whether the growth can continue, and the answer has always been affirmative so far. What’s more, the past improvement seems sufficient to justify holding the name even if growth slows substantially.

For example, over the last 12 months Hansen generated free cash flow (cash from operations less capital expenditures) of $98 million. Based on its $3.4 billion enterprise value, this equates to a 2.9% free cash flow yield. With the market turmoil having pushed 5-year Treasury yields below 2.5%, Hansen is now yielding a premium to Treasuries despite offering substantial growth opportunity – more than 40% sales growth in 2007 and another 30% or more expected in 2008.

By contrast, Pepsi (PEP - Annual Report) is offering a more generous 4.3% free cash flow yield, but is expected to grow just 7.5%. Meanwhile, Jones Soda (JSDA) is expected to grow a similar 30% in 2008 (though off less-impressive 2007 growth) but its cash flow from operating activity over the last year has been negative.

If Hansen grows as expected this year, its free cash flow yield (relative to the current enterprise value) would approach Pepsi’s. Any additional future growth would be a bonus from that point. And there seem to be many opportunities for the growth to continue.

For example, last February Hansen entered a distribution agreement with Pepsi-QTG Canada. This gives Hansen its first real crack at international sales, which increased from 2.6% of the total in the first nine months of 2006 to 4.0% in the same period last year. Its domestic distribution has also been enhanced by deals with Anheuser-Busch (BUD).

To incorporate earnings quality, I calculated an accrual ratio for Hansen, which describes how much of a company’s earnings (in this case, over the preceding 12 months) are explained by cash flows rather than accounting choices. The closer to 100%, the better, and Hansen’s accrual ratio has been much less volatile than I would have thought for a company growing so fast (rapid growth typically requires cash outflows that aren’t reflected in current earnings.)

Source: Zacks Research Wizard, compiled by William A. Trent

Operating profit margins were lower in the first nine months of 2007, but this was primarily due to the legal and accounting expenses surrounding an investigation of stock-option granting practices and the costs associated with terminating existing distribution agreements as the company enhanced its relationship with Anheuser-Busch.

The biggest risk for shareholders is probably Hansen’s choppy record with regard to earnings expectations. The company reported earnings below consensus expectations in two of the last four quarters, and since a miss in November the shares have shed more than 40% of their value. A two-year chart reveals a similar situation in mid-2006.

That 2006 sell-off proved in hindsight to be a terrific buying opportunity. Based on Hansen’s current valuation, I think the current one may prove to be the same.

Disclosure: No positions held at time of writing.

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The following is a reprint of my January 10, 2008 RealMoney column

John Hughes and Scott Maragioglio recently wrote that there are only three groups worth playing: international, commodities and defensive sectors like consumer staples. Within the consumer staples, I think one worthwhile play is Anheuser-Busch (BUD).

For one thing, there are the rumors of price increases that would help sales and margins. With overall beer sales flatter than the beer you set down and then forgot about, price hikes remain the most likely source of growth.

For another thing, the company is acknowledging the slower sales growth prospects by improving its cost structure and returning cash to shareholders. In the process, its EPS growth has the potential to exceed estimates by a wide margin.

Something that stays steady in a recession and throws off cash I will be able to use to buy recession bargains in other sectors? Sounds like a plan worth considering.

104 Million Barrels of Beer on the Wall

Anheuser’s latest sales report illustrates the good, the bad and the defensiveness of BUD. U.S. shipments to wholesalers were 104.4 million barrels in 2007 — up 2.1 million barrels or 2 percent over 2006, but nearly all of that growth (1.7%) was due to acquired and import brands. Sales of the domestic staples remain stuck in neutral.

But the import brands presumably sell at higher prices per barrel, which could contribute top-line growth even with flattish unit volume. For the first nine months of 2007, that is exactly what happened – sales grew 5.7%, well ahead of unit growth.

Up until now, the higher pricing has not resulted in higher margins. In fact, gross profit margin of 36.9% in 2007 was down from 37.1% in 2006. However, the planned across-the-board price increases could help on that front.

Anheuser-Busch generated more than $2 billion of free cash flow in the last 12 months, giving it a free cash flow yield of 4.4% against the current enterprise value of $46 billion. Although this yield is not the most compelling I have seen, it does offer a premium to the Treasury yield and would require cash flow growth of just 2% annually to meet my double-Treasury yield benchmark rate. Not to mention the value of a stock that could zig up as the market zags down.

Of the cash flow it generates, BUD shareholders receive the lion’s share. Earnings not paid out as dividends have gone to share buybacks, resulting in a 2% reduction to shares outstanding over the last year. Of course, the share buybacks have resulted in reductions to shareholders’ equity and elevated BUD’s price/book ratio to 11x, three times the industry average.

The flip side to a low book value, however, is a high return on equity. In Anheuser’s case, ROE exceeds 50%. With the high ROE available to fund further share repurchases and dividends, the company should continue to grow its EPS at a faster rate than its sales. In fact, the high ROE suggests a (theoretical) sustainable EPS growth rate of nearly 30%, though I would expect at least half of this growth to be offset by a declining price/book ratio.

Anheuser-Busch also owns a 35% stake in Mexican brewer Grupo Modelo. This investment contributed $540 million to net income in the first nine months of 2007, but because it is accounted for using the equity method there was no top-line contribution. Modelo is growing far faster than Anheuser-Busch itself, which should lead to increased contributions, which will cause EPS to grow at a significantly faster rate than sales, as well as a higher value for its ownership position.

All of these factors contributing to higher EPS growth bring me to the main reason I am intrigued by BUD: the potential for EPS growth to exceed the 8.5% analyst expectations over the next five years. The analysts have planted their expectations smack in the middle of the company’s 7-10% guidance for long-term growth, but the factors I have outlined lead me to believe double-digit growth is within reason.

Beer has been enjoyed for thousands of years (and many prior recessions and economic slowdowns.) It is even possible, though not likely, that a slower economy could help blue-collar beer regain some of the share it has lost to highbrow wines and spirits in recent years.

It’s not something that I would rely on as an investment thesis, but it does give me greater comfort.

Note: Always look for the best credit card offers and don’t get stuck with a financial burden.

First there were the socially responsible funds, which eschewed investments in “dirty” industries related to alcohol, tobacco, firearms, gambling or sex. The backlash, of course, was the “vice fund,” which specifically looks for stocks of questionable moral fiber. To see how the companies in that latter group are faring, I looked at the most recent conference call transcripts for what I consider a representative sample.

Rick’s Cabaret (RICK) shows that sex sells.

To begin the third quarter of 2007 our net income exceeded $1 million, we’re up 62% over 2006. Earnings per share or basic share were $0.17 versus $0.13. Our revenue topped $8.4 million which was up 35% over 2006 and our cash flows are up 52% for the nine months to $2.8 million.

The main driving factors, of course for the club, over the club operation with a gross income of $8.2 million and net income before tax on the club levels of $1.9 million. The main drivers of this is the Ft. Worth location which exceeded our expectations, we closed at the end of April. So we basically have about 10 weeks in the quarter from that location. The Austin and the San Antonio locations are now improving. We were able to cut some losses in San Antonio, although I changed some expenses and actually increased our revenues a little. The Austin Club is continuing to improve, we had a grand opening in August of the second floor of VIP area and we’re hoping to see continued growth there. And of course our New York City location having record months, and we are still continuing to see very strong growth in our New York City location.

Same club, same period, sales were up about 10%, which we’re very pleased with. We hope to continue that trend.

(Excerpr from full RICK conference call transcript)

Meanwhile, Altira (MO) shows tobacco isn’t exactly smoking.

PM USA’s shipment volume of 45.6 billion units was down 3.3% or 1.6 billion units versus the prior year. In the first half of this year Philip Morris USA estimates that total cigarette industry volume declined between 4% and 5%, and it is maintaining its prior estimate of a 3% to 4% decline in total industry volume for the full year 2007….

Turning to our international tobacco business; in the second quarter PMI’s operating companies income increased 4.7% to $2.2 billion, due primarily to higher pricing and favorable currency of $87 million, partially offset by higher asset impairment and exit costs of $76 million.

PMI’s cigarette shipment volume increased 3.3% or 7.1 billion units to 221 billion units, due primarily to the acquisition volume from Lakson Tobacco in Pakistan. Volume gains in several markets, including Argentina, Egypt, Indonesia, Korea, the Philippines and Ukraine, as well as the favorable timing of shipments in certain markets, were partially offset by shipment declines in Germany, the Czech Republic and Russia, as well as Japan, where comparisons to the second quarter of 2006 were distorted by heavy trade purchases in anticipation of the July 2006 excise tax increase.

Excluding the impact of acquisitions, PMI’s cigarette shipment volume was down 0.5%.

(Excerpt from full MO conference call transcript)

Anheuser Busch (BUD) is anything but flat.

Industry sales trends continue to be very good, despite the difficult comparison with the unusually strong first-half of last year when shipments increased 2.9%. Anheuser-Busch’s U.S. market share for the first six months of the year decreased one-tenth of a share point on a shipment basis.

Revenue per barrel increased 3.1% in the second quarter and was up 2.7% year-to-date. Front line price increases contributed 190 basis points to revenue per barrel growth in the second quarter. Promotional price adjustments contributed 10 basis points and portfolio mix was favorable by 110 basis points due to the mix impact from the import brands.

Average promotional prices were higher than the prior year for both the Memorial Day and Fourth of July holidays and we are encouraged about the outlook for the promotional pricing environment for the Labor Day weekend and the remainder of the year.

Consistent with the timing pattern for our 2007 pricing actions, we anticipate implementing price increases on the majority of our volume early next year with a few increases planned for the fourth quarter of this year. As in the past, AB’s pricing actions will be tailored to specific markets, brands and packages.

Our international beer segment net income increased 14% in the second quarter and was up 19% in the first-half, led by Grupo Modelo.

(Excerpt from full BUD conference call transcript)

Finally, MGM Mirage (MGM) is on a roll.

As far as operating results, net revenues increased 10% to $1.9 billion, up 4% excluding Beau Rivage, an all time revenue quarter for the company. Our fundamentals are clearly strong as evidenced by tremendous hotel results and excellent cash flow results across our portfolio of resorts.

As mentioned in the release, we had an all-time record second quarter property EBITDA of $686 million, which represents a 9% increase over the prior year. Las Vegas Strip occupancy percentage of 97.8% was our company’s highest occupancy since 2000. Combined with a strong average room rate of $162, our Las Vegas Strip RevPAR was up 7%. Demand has remained robust and increased visitor volume to our Las Vegas Strip resorts continues to drive revenues.

MGM Grand Las Vegas earned $108 billion of EBITDA which is an all-time record for any quarter in that property’s history, and a 43% increase from the prior year. TI and Excalibur also earned all-time record property EBITDA. The Mirage earned $59 million, a record second quarter which represented 41% increase over the prior year. New York, New York also had a record second quarter. Bellagio had its second-highest ever second quarter property EBITDA against a very tough comparison to the second quarter of ‘06, despite having an abnormally low hold percentage this year and a high hold percentage last year.

(Excerpt from full MGM conference call transcript)

Based on this admittedly selective sample, business is good for sin stocks. Even MO, the lone representative with declining sales, makes up for it with its generous dividend.

Disclosure: Author is long IShares MSCI Japan Index (EWJ) at time of publication.

With the end of the first quarter approaching, it is time to adjust the names in our Watch Lists. We will price all the new lists as of the close on Friday, March 30. Today we present our planned updates to the Large Cap Watch List (Track at Marketocracy).

Though less than the Small Cap Watch List and Mid Cap Watch List (Track at Marketocracy), there was still relatively high turnover in this list. 14 of the original 33 names made the cut for the new list (which was trimmed to just 26 names.) Part of the reason for the turnover was to reduce overlap between the lists. One third of the Mid Cap Watch List (Track at Marketocracy) names appear on each of the Small Cap and Large Cap Watch List (Track at Marketocracy)s, but there is no longer any overlap between small and large.
So without further ado, the names on the chopping block from the previous list are:

3M (MMM); Continental (CTTAY.PK); Mitsui (MITSY); Anheuser-Busch (BUD); ConocoPhillips (COP); Helix Energy (HELX); IndyMac Bancorp (NDE - Annual Report); Barr Pharmaceutical (BRL - Annual Report); Quest Diagnostics (DGX); Public Storage (PSA); ITT Educational Services (ESI); Equifax (EFX); Rent-a-Center (RCII); Kroger (KR); Ricoh (RICOY); First Data Corp. (FDC); Expeditors International (EXPD); and Keyspan (KSE).

The new list is:

We asked, but no one answered. So we are taking our own counsel and breaking our Watch List into three portfolios: Small Cap, Mid Cap and Large Cap. Each will be tracked against the relevant S&P index going forward from their collective inception date of January 31 (priced at the close of market trading that day.)

For your viewing pleasure, the Large Cap Watch List (Track at Marketocracy) (to be measured against the S&P 500) follows.

Astute observers will notice less overlap between this watch list and the names in the Small Cap Watch List and Mid Cap Watch List. This was not for lack of overlap, as the smallest S&P 500 name has a market capitalization of $600 million, which would allow for complete overlap with the Mid Caps if we chose. Instead we selected an arbitrary low of $2 billion for large-cap names, which cuts off five names that are actually in the S&P 500.
In addition, we will provide a “quick and dirty” analysis of each name, with a goal of one such analysis per day. As the name implies, the quick and dirty analysis will be incomplete. We are hoping you will join in the debate and fill the gaps in our analysis.