Anheuser-Busch stock could be going a bit flat
Dear Mr. Berko:
I’m thinking of buying $10,000 worth of Anheuser-Busch stock, which is selling at $44 a share. I’d like to buy it because Warren Buffett bought a large block of the stock in May 2005 at $45 a share. If Buffett thinks the stock is good enough for him, then I’m willing to invest $10,000 (about 250 shares) for the next couple of years. So please tell me what you think of the stock.
C.G., Springfield, Ill.
Dear C.G.:
Anheuser-Busch Co. (BUD-$44) is the world’s largest brewer with $1.5 billion in annual revenues. The company also operates one of the largest theme parks in the United States, is the second-largest manufacturer of aluminum beverage cans and recycles more aluminum cans than any other company in the universe.
BUD has 50 percent of the U.S. beer market as well as owning 50 percent of Grupo Models, the largest beer brewer in Mexico. Anheuser-Busch has the distinction of being one of 75 public companies that have increased their dividends every year for the past 25 years. But 2005 may be the first time in 25 years that BUD’s profits have not increased over the previous year. However, BUD is given a five-star ranking by the analysts at Morningstar, who think the stock could rev up to $57 in the next 12 months, and BUD also enjoys Standard & Poor’s coveted A-plus rating.
However, I’m not keen on the stock. BUD recently reported lower third-quarter profits, which were blamed on a 2.6 percent decline in beer sales this year, higher energy costs and increased material costs. The company’s net profit margins, which were 15 percent in 2004, are expected to fall to 13.2 percent for the year, return on total capital is likely to crash to 19.3 percent from 22.5 percent, and the all-important cash flow per share will take a first-time decline in 25 years to $3.80 from $4.08.
I don’t know why Berkshire Hathaway Inc. (BRK.A-$89,300) purchased BUD, which is now one of the 33 stocks in Warren Buffett’s portfolio. When he bought the position in March, Buffett publicly commented that Busch was in a “fascinating industry that might not generate quick payoffs for Berkshire shareholders.” Buffett said the beer industry is “easy to understand” and that he believes BUD’s management has the talent to safely and dependably increase shareholder value.
Anheuser-Busch’s largest competitors, SABMiller and Molson Coors, account for 30 percent of the beer market. However, Buffett is mindful that BUD’s scale advantage allows the company to demand exclusivity from nearly 65 percent of its distributors and Molson and SABMiller only have 9 percent of their volumes exclusively distributed. This is a darned important consideration. According to analysts, this exclusivity should “enable BUD’s revenues to grow some 3 percent to 3.5 percent annually over the next five years.” Well that’s hunky-dory, but why did BUD’s domestic volume fall by 2.6 percent this year?
Some blame the wine and spirits industry, and rightfully so, as volume here grew by 6.1 percent in 2004 and 6.8 percent in 2005. A panoply of imported beers and myriad microbreweries also have stifled BUD’s revenue growth. However, there’s a very real possibility that drinking beer has become less popular while wine and spirits consumption has become the thing to do.
BUD has rather high fixed costs (typical in the brewing industry) and as a result, slack volume trends can have a nasty effect on profits. As TV advertisements portray more people drinking wine, wine coolers and various spirits, BUD’s beer volume suffers even more. And as wine and spirits consumption continues to grow, brewers are more willing to discount their prices in order to maintain volume, and that’s not good for the company’s net profit margins or net profits.
I like Anheuser-Busch. It’s a well-managed company, it sells a swell product and management is going to roll out as many programs as it can aimed at increasing beer volume and market share growth. I expect that BUD will soon introduce new products, create attractive packaging, increase domestic advertising, generate unique promotions and develop on-premises sales activities.
But the domestic beer business is in a slump, and there’s a growing crowd of upscale 20-, 30- and 40-year-olds who think it’s uncool to drink beer but real cool to drink a wine cooler or a cold Smirnoff. This is the crowd BUD must reach.
I think the shares are untimely now and believe that the stock will trade in a narrow range between $47 and $43 for the next year or so. If BUD’s promotions are successful, my advice will be wrong as Corrigan.
Rather than buying 250 shares, consider straddling the fence — buy 125 shares just in case I’m wrong. And I hope I am, because I have the warm fuzzies for Anheuser-Busch.
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.
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