For Buffett, Something Stronger Than Coke
http://www.thestreet.com/_googlen/markets/natworden/10219069.htmlFor Buffett, Something Stronger Than Coke
By Nat Worden
TheStreet.com Staff Reporter
4/21/2005 3:31 PM EDT
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Shares of Anheuser-Busch (BUD:NYSE - commentary - research) jumped Thursday on news that Warren Buffett took a shine to the king of beers.
The stock was recently up $2.94, or 6.5%, to $48.04 after it announced that Berkshire Hathaway (BRK.A:NYSE - commentary - research), the holding company run by the legendary Buffett, became a "significant shareholder" in the brewing giant.
Known as one of the most successful value investors in history, Buffett's investment choices are closely followed by Wall Street. When Buffett revealed a stake in Pier 1 (PIR:NYSE - commentary - research) last August, the stock gained almost 9% in one day.
The stake didn't appear to be contained in any recent regulatory filings. Still, Anheuser-Busch looks like a classic value play for the Oracle of Omaha.
With consumer-driven stocks in a tailspin, the brewer of Budweiser and Michelob beer has been hit particularly hard in recent months, due to concerns about the domestic beer market. A price war has been developing between Anheuser-Busch, the market leader, and Miller Brewing Company and Molson Coors Brewing (TAP:NYSE - commentary - research), the Nos. 2 and 3 players, respectively. Meanwhile, wine and spirits companies, like Constellation Brands (STZ:NYSE - commentary - research), have also been stealing market share as consumers shift to more weight-conscious beverage options.
"We had hopes that [Anheuser-Busch's] innovation pipeline might be able to pull the company out of its funk, but the results just aren't there yet," wrote Bear Stearns analyst Carlos Laboy in a recent research note. Laboy downgraded the stock to peer perform in March.
In early April, the company confirmed many of the concerns about its short-term business prospects when it shaved its 2005 earnings forecast for the second time since February. It said its 2005 profits would grow in the low single digits.
Before Thursday, the brewer's shares had shed 15% of their value since June 2004. At last night's close of $45.10, they traded at around 16 times 2006 earnings estimates. At that level, Morningstar analyst Matthew Reilly said the shares looked cheap. Using a discounted cash flow model, he estimated the company's fair value was closer to $64 a share, offering significant upside opportunity to today's price, even after the market added the Berkshire premium.
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"Although we expect 2005 to be a difficult year for Anheuser-Busch and the domestic beer industry overall, we feel that investors with the perseverance to hold on to the stock through tough times will be rewarded when the domestic market improves," Reilly wrote in a recent research note. "We believe that short-term disappointments can provide some of the best opportunities to pick up shares of dominant, wide-moat firms such as Anheuser-Busch."
The company controls nearly half of the American market and has more than twice the share of its nearest competitor. With an annual dividend yield of 2.2% and free cash flow of about $1.85 billion, it offers some safety. Now, it is focusing on product innovation and packaging to rebound from its recent hard times, and Reilly thinks its exclusive distributor base, which accounts for about 69% of domestic volume, will help it succeed.
posted by USstock @ 3:44 PM
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