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April 25, 2005
Buffettweiser’s Next Bottom Buy

“Anheuser-Busch has recently learned that Berkshire Hathaway Inc. has become a significant shareholder, based on information available to the company. Anheuser-Busch welcomes Berkshire Hathaway as a shareholder.” Anheuser-Busch.  April 21, 2005

It was not surprising that following the above statement BUD shares promptly soared by more than 6%.  After all, when Buffett buys anything other investors follow. However, what was surprising was how vague the Anheuser-Busch press release was.  How did A-B ‘learn’ of Berkshire’s BUD investment?  For that matter, what in the world does ‘significant’ mean? An SEC filing from A-B last week clarified nothing, and no filing from Berkshire has been made.  Thus, many questions remain.     

How Significant?


After studying BUD’s chart you could speculate - solely from abnormal volume trends - that Buffett (Berkshire) started pecking at BUD after the company warned of a 2005 earnings miss. Assuming Buffett was aggressively buying and accounted for the majority of the new volume in the stock since April 6, Berkshire could own 6-8 million shares of BUD today.  Using the high estimate of 8 million shares, this would mean that Berkshire experienced an investment cost of $364 million (at an average price of $45.50).  And while this stake may be ‘significant’ to BUD management, it is barely worth mentioning as far as Berkshire is concerned.

Look at it this way, you have $100,000 in cash, and after concluding that BUD is an excellent company you buy $764 of BUD stock (Berkshire has $47.6 billion in cash/equivalents and their BUD investment may have cost around $364 million). That $99,236 of your money still sits in cash speaks volumes. That you risked a mere $764 on BUD is an afterthought.  

Why Did Buffett Buy Into The King of Beers?

Forgive me for trying to depict Berkshire’s BUD stake as irrelevant. After all, no matter how many billions he has at his disposal you can rest assured that Buffett is not throwing hundreds of millions of dollars at junk.  Indeed, despite an uncertain growth outlook (BUD’s highest annual revenue gain over the last decade was only 5.89% registered way back in 1994), BUD is definitely not junk.  Rather, the company controls nearly 50% of the US beer market, produces solid free cash flow ($1.8+ billion in each of the last three years), and consistently posts strong gross margins (40% in each of the last 3-years). Moreover, despite increasing its dividend by an average of 6.4% annually over the last decade, as a percentage of cash from operations BUD’s dividend has remained extremely consistent at 25%. Finally, the company is increasing its stake in China’s top beer brewer (Tsingtao Brewery), and has shrunk its outstanding share base in each of the last 10-years.
 
These positives aside, BUD’s dividend yield is unattractive on its own, price-to-free cash (before dividends or working capital adjustments) is only fair at 20, and domestic beer sales are stagnating.  Accordingly, to say that Buffett sees BUD as an unbelievable value purchase right now may be a stretch. Rather, what is more likely the case is that Buffett is taking a small taste of BUD (not unlike he did Cadbury in 2004) on the knowledge that shares have been beaten down and the long-term outlook for the company remains solid. The key to this investment approach is that if BUD shares get beaten down even further Buffett is prepared (and happy) to buy more.

Buffett’s Next Buy

Assuming Buffett continues the (BUD) trend of buying beaten down market leaders, one company that could soon be on his radar screen is Wal-Mart.  Not only has Buffett previously said that not purchasing Wal-Mart was one of his greatest investment regrets, but, like BUD, WMT shares are trading near a 52-week low.  There are countless value type mangers that would love to own Wal-Mart during any further/serious sell off.  Don’t be surprised if Buffett is one of them.

Also don’t be surprised if any Berkshire investment in WMT is a $764 taste, from a man with a deep hunger.