The Sage and the Suds
By Adrienne Carter
Legendary investor Warren Buffett and his cronies at Berkshire Hathaway (BRK.A ) are sniffing around the stock market again. Anheuser-Busch (BUD ) announced on Apr. 21 that the Omaha insurance company, which had been sitting on a $43 billion pile of cash equivalents at the end of 2004, is now a major shareholder in the St. Louis brewer. Buffett had lamented to shareholders that he found few attractive securities to buy last year.
Neither company disclosed just how big a stake Berkshire bought. But the size of other investments in Berkshire's portfolio range from 1.3% of a company, in the case of PetroChina (PTR ), to as high as 18.1%, in Washington Post (WPO ). Purchases made by GEICO, a Berkshire-owned company, are typically around $200 million to $300 million.
"We yearn to buy more fractional interests similar to those we now own or -- better still -- more large businesses outright," Buffett wrote in his recent annual letter to shareholders. "We will do either, however, only when purchases can be made at prices that offer us the prospect of a reasonable return on our investment."
Anheuser-Busch looks like a good value right now. Although the stock gained 7% on news of the Buffett investment, rising to $48, it's still priced well below its 52-week high of $55. At current levels, the stock is trading for 16 times earnings, a 27% discount to its five-year historical average.
That's because the nation's largest brewer has been struggling of late. It faces pressure from domestic rivals, and as the industry leader it must also contend with the increasing threat from wine and spirit makers.
The No. 2 light beer, Miller Lite -- which has been sniping at its much larger rival in TV ads -- has made a major comeback in the past year. Sales of Miller Lite were up 10.5% by volume in 2004, compared with 3.7% for Bud Light, according to industry publication Beer Marketer's Insights.
Wine and spirits have also upped the ante, increasing their marketing effort in bars and restaurants. Last year, spirit makers alone spent $430 million on advertising and the like, according to the Distilled Spirits Council of the U.S., a trade group. It's working. More and more consumers are switching from Bud to Bacardi. Beer represented 60% of the total alcohol market back in 1995. Today it's more like 56%.
All those competitive forces have left Anheuser sales flat. In 2004, it failed to increase its share of the domestic beer market for the first time in nearly a decade. And the momentum this year isn't in its favor either. Beer sales to wholesalers dropped by nearly 3%, to 24.4 million barrels, in the first quarter. Anheuser lowered its 2005 profit outlook in April. It now expects earnings to grow 1% to 4% this year.
Value players like Buffett, though, often see opportunities in such turmoil. Contrarian Brian Rogers of T. Rowe Price Equity Income snapped up shares of the brewer last year, citing the formidable marketing power of the Anheuser-Busch. "Every time I see their Super Bowl ads, I think they're great marketers," says Rogers.
Jensen Investment Management, which buys companies that are trading at a significant discount to what it estimates they're worth, owns roughly 2 million shares of Anheuser. It started buying the company back in October. "They have a good international position in the industry, a high return on equity, and steady free cash flow," says Jensen's Robert Zagunis. "It's all the things we like, and apparently Buffett likes them, too." And for an investment, Buffett isn't a bad endorsement.
Carter is a correspondent in BusinessWeek's Chicago bureau
Edited by Beth Belton
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