Valuation: Anheuser-Busch Companies (BUD)

Company Profile: Anheuser-Busch Companies, Inc. (BUD) (Obtained through Google Finance)

Anheuser-Busch Companies, Inc. (Anheuser-Busch) is the holding company of Anheuser-Busch, Incorporated (ABI), a beer brewer. The Company is also the parent corporation to a number of subsidiaries that conduct various other business operations. The Company’s operations comprise four segments: domestic beer, international beer, packaging and entertainment, which contributed 74.7%, 6.6%, 10.9% and 7.8%, respectively, of the Company’s net sales, during the year ended December 31, 2006. Approximately 93% of the Company’s net sales are generated in the United States. Worldwide sales of the Company’s beer brands aggregated 125 million barrels in 2006, which comprises domestic and international volume. International volume represents Anheuser-Busch brands produced overseas by company-owned breweries, under license and contract brewing agreements, plus exports from the Company’s United States breweries

Business and Management Review

1) Is the business simple and understandable?
Anheuser-Busch’s primary business is the manufacturing and distribution of beer and malt beverages. The firm is the largest beer distributor in the United States with Miller and Coors (both firms recently merged) filling out the top three beer distributors.

2) Does the business have a consistent operating history?
Anheuser-Busch has been located in St. Louis, MO for over one hundred fifty years operating as a brewery. This firm is the staple of American macro breweries and we are confident with the track record in terms of operation.

3) Does the business have favorable long term prospects?
The firm will continue to enjoy healthy sales as their staple beers Bud and Bud Light hold massive marketshare. However, with increasing competition coming from the newly merged Miller-Coors as well micro-breweries such as Boston Beer Company it will not be as easy for Anheuser-Busch to remain in the legacy position they have enjoyed for decades.

4) Is management rationale?
The Busch family has run the company since the firm’s inception and will more than likely continue to do so in the future. We are somewhat concerned that the family legacy of the Busch family may overshadow the need for innovation and creativity in the marketplace.  

5) Is management candid with its shareholders?
Investor relations seem to be strong as the firm provides all relevant information an intelligent investor would need.

6) Does management resist the institutional imperative?
Anytime both the Chairman and CEO position is held by the founding family of a firm one must be somewhat concerned. However, the large blocks of shares owned by institutional investors would keep management checked and inline, therefore we are not concerned.

Financial and Value Review

Defensive

1) Size of firm
The firm falls below the $2 billion market capitalization threshold and therefore fails this test.

2) Strong financial condition
With a weighted current ratio of 0.86 BUD fails this test of being above 2.

3) Earnings stability
There has been positive net income for the past ten years and therefore the company passes this test.

4) Dividend record
The company has paid a dividend for the past ten years and therefore passes this test.

5) Earnings growth
Anheuser-Busch has increased their EPS by one third over the past ten years therefore they pass this test.

6) Price to earnings analysis
The firm has a weighted P/E ratio of over 21 therefore is above the cutoff of 20.

7) Price to book analysis
With a P/B of over 12 the firm fails the test of having a P/B ratio below 2.5.

Conclusion:
With a score of 3/7 Anheuser-Busch fails the Defensive investor test.

Enterprising

1) Strong financial condition
With the weighted current ratio of 0.86 the firm fails the test of being above 1.5.

2) Earnings stability
There has been positive net income for the past five years and therefore passes this test.

3) Dividend record
The firm currently pays a dividend and passes this test.

4) Earnings growth
Earnings are greater than five years ago therefore it passes this test.

5) Price less than 150% of net tangible assets?
The current share price is more than 150% of the tangible assets and thus the firm fails this test.

Conclusion:
With a score of 3/5 the firm fails the test for the enterprising investor.

 
Valuation
We find a fair price for Anheuser-Busch to be around $39.

 

Opinion
Given the current share price of $52.87 and our valuation of $39 we find this security to be overpriced. We would be comfortable paying roughly $30 a share and with the stock trading about 55% above our target price it is not suitable for either the defensive or enterprising investor.

None of the ModernGraham staff held a position in Anheuser-Busch at time of press. Also, please review our disclaimer and our methods of valuation.