Humility at BUD?

Anheuser-Busch's (BUD) 2008 annual report contains a graph that money managers hate to see describing one of their multi-year holdings:

BUD's share price has significantly underperformed other baskets of stocks as measured by these two indices. In the meantime, as I have written about in an earlier post, BUD's operational characteristics have been excellent. I continue to believe that BUD is no dud.

In keeping with the title "Scott's Random Bits," I do want to introduce evidence that something is happening at BUD: the latest generation of Busch leadership - August IV - has a signature which is increasingly reflecting the stock price pattern. In this first signature, the 2006 annual report shows his signature as CEO for the first time after succeeding Patrick Stokes:







Look at the change only 12 months later:

Dollar's Woes

I took my family to Switzerland for spring break and experienced the same painful lack of purchasing power that others have written about and the financial markets have demonstrated. The dollar's decline has been almost straight down, prompting investors to wonder if the bottom is near.

Today's announcement that Omaha, Nebraska-homebody Warren Buffett is taking a tour of Europe to look for investments is a resounding "NO." In the nineties, Mr. Buffett would reply to questions about global investing by stating that overseas investing was beyond his competence. Further, he would add that the U.S. was the location for thousands of opportunities and that if he couldn't find one competently in that pile, why look elsewhere. But that was back in the day of the strong dollar.

His annual reports are consistent in a cry against the weakening dollar. He is putting his money where his mouth is. After starting out with trades against the dollar, he has moved on to long term investing outside the U.S. - a serious indictment of current dollar-based policies and a caution for dollar-based investing.

Capital ExpAnditures in Cable

This graph depicts the probable culprit for the low prices of cable stocks: a pattern of expanding capital expenditures. The analysts at Smith Barney have produced a graphic depictions of promises made and not kept (I hope Tessa - my graphics star daughter - doesn't attempt the same about me).

While capital expenditures have continued at a surprisingly high level, the dramatic improvements in data speeds and additional telephony income has certainly paid its way. In another post (imaginatively titled "Cable Profitability), I depict the significant margin expansion available for cable when connectivity charges go away as the business matures.

Cable Profitability

This graph depicts the surprising profitability of the "triple-play" of video, data and telephone currently promoted by cable systems. "ARPU" is cable-speak for Average Revenue Per User. The amounts depicted are the monthly numbers.

On closer inspection, after removing the $9 of telephone set up costs, cable generates nearly $40 per month per service of pre-tax profits. This number would indicate a higher level of profitability than is evident from the financial statements of the cable companies, which embed improvements, anticipated technologies and high-cost acquistions.

The typical subscriber generates roughly $100 per month, indicating the average of two services: one video and one other. The profits on existing systems then would average $80 per month or $960 per year. By taxing these profits at 40%, the after-tax profits are roughly $600 per year. The current market value of roughly $3000 per subscriber for Comcast and Time Warner Cable seems low, implying a P/E of 5.

NVR

In my lexicon, NVR, a major homebuilder, stands for Not Very Risky. NVR was reborn in 1993 after declaring bankruptcy in 1992. The lessons learned then continue to pay off today. NVR does not tie up capital in lots, preferring instead to put options on them. The results have been excellent. The following chart describes the kind of steady stock results I prefer: