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By Dave Sekera, CFA | 03-26-2014 11:00 AM

A Moat Filled With Beer

This brewer offers bond investors good value for their money, with its structural competitive advantages that provide a strong financial foundation for the long term.

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Dave Sekera: We give SABMiller a credit rating of A. That's higher than that of the credit rating agencies who rate the company Baa1 and BBB+. There are likely several differences between our credit rating methodology and that of the agencies that account for those differentials.

First, we do believe that the company has a wide economic moat. Essentially, what this means is that we believe the company has long-term structural competitive advantages that should last 20-30 years. Essentially, what we believe is this company can generate returns on invested capital greater than its weighted average cost of capital for that long of a time period.

Now, as an analyst I know no one can really forecast a company's credit metrics and a company's financial performance that far in the future. But when I'm recommending long-term bonds, I look for these companies that have these structural competitive advantages because I know through several different business cycles they'll be able to generate these returns, and they'll be the survivors in the industry that far out. If anything does happen--for example there's a paradigm shift or there's a very deep recession--these will be the guys that survive at the end of the day.

Second of all, our ratings are really meant to be more forward-looking in our analysis as opposed to historical or backward-looking. So, in 2012 when the company did make a very large acquisition of Foster's Brewing, an Australian beer company, they did leverage up their balance sheet. However, we were forecasting at that point in time that they would quickly repay a lot of that acquisition debt and deleverage their balance sheet. Since then they have done so, and we expect over the near-term that they will continue to keep deleveraging over the next couple of years.

So, when I'm taking a look at the company's bonds, I'm looking at them both on an absolute as well as a relative value basis. Right now, they have some 2022s that are outstanding. They're trading about 90 basis points over Treasuries. For those investors looking for a little bit longer-duration bond, they do have some 2035s which are the old Foster's Brewing bonds outstanding. Those are trading about 130 basis points over Treasuries. So, compared with where other companies within the sector such as Anheuser-Busch InBev trade and compared with where the ratings are--our A rating versus how the market is pricing it, more like an upper BBB or low A--we think investors get good value for their money here.

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