Performed by: Tech Investments

45 Pages·2005·0.24 MB·English

Evaluation and Analysis of:

Performed by:

Tech Investments

Market Recommendation: Hold
As of December 3rd, 2004
Ticker Symbol: BUD Valuations (As of Nov.1st, 2004)
S&P 500 Price 50.79 Actual Price 50.71
52 week range 49.42-54.74 AEG Model 55.04
Market Cap 40.13B RI Model 83.97
FCF 64.19
Sales 13,279B
SHS OS 790.07M
Div. Yld 1.94%. EPS 2003 2004 2005 2006
1.72 1.70 1.75(e) 1.85(e)
A-B Industry
ROE 81.21 63.34
P/E 18.77 18.87 Beta -.07
P/B 14.51 11.33 Stnd. Dev. .1881
LT D/E 2.91 2.33

• Anheuser-Busch should be held as it is under valued according to several models; efficiency of management
and financial strength make Anheuser Busch a consistent asset to any portfolio.
• Anheuser-Busch remains as the commanding leader of its industry in terns of financial stability, and is able to
focus great amounts of resources toward growth and expansion.
• During 2004, the alcoholic beverage industry has declined slightly leading to a consistent decline in the price
of Anheuser Busch, but Anheuser Busch continues to outperform the industry and the market in terms of
growth.
• Anheuser Busch continues to grow by increasing their presence in the foreign market.
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Business Summary
Industry and Competitors
Anheuser-Busch Companies, Inc. (Anheuser-Busch) has the second
largest market capitalization of all members of the alcoholic beverage industry.
Anheuser-Busch is listed on the S&P 500 index within the industry of alcoholic
beverages, but the company consists of many various subsidiaries. The business
segments of Anheuser Busch consist of domestic beer, international beer,
packaging, entertainment, and an array of real estate development businesses.
The domestic beer manufacturing segment includes the integration of rice, barely,
and hops operations. Included in the packaging segment is all processes required
to produce, label, recycle, and ship all aluminum can and glass bottle products.
These vertically integrated processes give Anheuser Busch the competitive
advantage of being fully self-sufficient within the domestic beer segment.
Additionally, the international beer segment includes the recent acquisition of
China’s largest brewer. Anheuser Busch’ s major domestic competitors include
SABMiller, Adolph Coors Co., Pabst Brewery Co., Grupo Modelo, and Heineken.
Additional foreign competitors include Allied Domecq PLC, Diageo plc, and
Companhia de Bebidas das Americas. The industry for alcoholic beverages is
very competitive. Anheuser Busch has been successful in retaining a large share
of the industry market cap by utilizing its self-sufficiency to offer competitive
prices.

Strategy
Anheuser-Busch’s business strategy is reliant to its ability to offer
competitive prices and more brand differentiation than its competitors. Anheuser
Busch is also able to differentiate by offering a full line of non-alcoholic
beverages, as well as utilizing its other business segments such as packaging and
entertainment. Anheuser Busch focuses heavily on brand recognition, and invests
largely in promotional techniques. Anheuser Busch’s accounting strategy relies
heavily on transparent reporting, as they have openly expressed an effort to ensure
that all accounting methodology meets GAAP regulations. Anheuser Busch has
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used its accounting flexibility, within GAAP, to illuminate the true economic
standing of all its holdings. The main financial strategy employed by Anheuser
Busch is to use its immense financial resources, good credit rating, and low cost
of capital to continuously expand their operations.

Accounting Analysis
In valuing any corporation, it is crucial to understand the validity of the
financial statement. In examining Anheuser Busch’s financial statements, we
have concluded that they utilize the accounting flexibility that is permitted by the
SEC within GAAP to accurately portray the true financial situation of the
company. The accounting policies used primarily follow industry norms, and no
significant “red flags” were examinable.

Financial Strength and Performance
Financial Information
The information contained within the financial statements has highlighted
the strengths of Anheuser Bush. The calculation of various financial ratios shows
that Anheuser-Busch is a fairly liquid company, despite its low current and quick
ratio. Profitability is strong, with a gross profit margin of almost fifty percent.
This and many other indicators of profitability are on the higher end of the
industry benchmark. Anheuser-Busch is highly leveraged, having more than four
times more debt than equity. This is indicative of Anheuser-Busch’s capital
structure and financial strategy, however, as they are able to borrow cheaply due
to a good credit rating and a reputable position in the industry.
The financial strategy enforced by the management is performing well, as
sales have grown steadily, and are forecasted to continue the rising trend. Net
profit margin is increasing as well, which is surprising given the recent costly
acquisition in China’s market, which would likely give a hit to profit margins.
The management at Anheuser-Busch is operating efficiently, which is apparent in
the extremely high ROE. Anheuser-Busch has been efficiently utilizing its
business strategies to find return on equity that far surpasses the industry norm.
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The focus of the management is clearly on moving forward and expanding the
already commanding share of the alcoholic beverage market. The management is
also making great effort to increase the brand recognition, one of Anheuser-
Busch’s competitive advantages, by increasing spending on marketing and
promotions.

Valuation
Anheuser-Busch is valued as a HOLD security, as it has been determined
to be undervalued. With the application of several valuation models we have
determined that the actual market price is actually less than the valued price. The
security should be held because of the competent management and strong
business strategies employed by the firm. The dividend yield is consistent with
the market, and the company has a long history of paying dividends and offering
stock splits. The security did not receive a buy rating due to past pricing
performance and indications of weak points within the forecasts, such as
decreasing working capital.

Overall, Anheuser-Busch is strong company with foreseeable growth opportunities. The
competent mangers will likely continue to enforce the successful business strategies that
are a fundamental part of Anheuser-Busch. This company has many competitive
advantages and a vast amount of resources to work with. The market value does not
seem to accurately portray the true value of Anheuser-Busch, so it is recommended to
hold this security.

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Anheuser-Busch Five Forces Analysis

Competitive Forces

Rivalry Among Existing Firms:

Industry Growth: In the market for alcoholic beverages, more specifically the
beer industry, the market is consistently and constantly growing. In order to
obtain market share from rival companies Anheuser Busch is constantly using
marketing techniques and product differentiation. This allows Anheuser Busch to
market to different sectors of the population and grow on a consistent basis.

Concentration and Balance of Competitors: While many breweries exist in the
industry, there are only two or three major competitors to Anheuser Busch.
Despite the fact that Anheuser Busch is a dominant market leader in the industry
(see chart), it maintains heavy advertising and competitive pricing to retain
market share.
GLOBAL BREWERS RANKED BY VOLUME

Company Symbol Price Change Market Cap P/E
ANHEUSER BUSCH BUD 51.09 0.67% 40.92B 19.22
SABMILLER PLC S/ SBMRY.PK 12.55 -3.46% N/A N/A
HEINEKEN N V A D HINKY.PK 29.90 -1.97% 14.65B 24.33
COMP DE BEBIDAS ABV 21.03 -0.33% 7.89B 17.38
Carlsberg Breweries A/S Private - View Profile
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Companhia de Bebidas das Américas Private - View Profile
Scottish & Newcastle plc Private - View Profile
Grupo Modelo, S.A. de C.V. Private - View Profile
ADOLPH COORS RKY 68.37 -0.01% 2.56B 14.56
KIRIN BREWERY KNBWY 8.78 -0.79% 8.48B 29.07

*www.finance.yahoo.com

Degree of differentiation: Anheuser Busch differentiates its product by offering
more of a variety of beer than its competitors, from a premium quality product, to
many low cost variations. Anheuser Busch extends its market exposure by
acquiring other venues to promote its products, such as Sea World, Busch
Gardens, and various philanthropic works.

Learning Economies: Because of a steep learning curve in the industry for beer,
the size of the company is crucial in obtaining and securing market share.
Companies in this industry compete aggressively for market share.

Excess Capacity and Exit Barriers: Excess capacity is not a major factor in this
industry, as there is always a high demand for beer. If demand does drop, the
industry is able to reduce output and unload excess inventory. Due to the low
degree of specialization, exit barriers are relatively low.

Threat of New Entrants:

Economies of Scale: The large economies of scale present in the industry are an
advantage to Anheuser Busch because it discourages the threat of new entrants.
New entrants must be able to invest in large capacity or enter into the market with
less than optimal resources.

First Mover Advantage: Anheuser Busch set industry standards by being one of
the first movers to establish brand name recognition. By creating close
relationships with suppliers, this allowed them to keep costs at a reasonable level.
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Relationships and Distribution Channels: Anheuser Busch is able to maintain
existing relationships with their distributors because they are a reputable company
in the industry. New entrants will have difficulty obtaining the same kind of
relationships because their brand is not as marketable.

Legal Barriers: There are many federal, state, and local environmental
regulations that must be met before building a brewery. Packaging transportation
and distributing beer also has an excess amount of laws. There are somewhat
higher taxation levels that may also bar smaller companies from entering this
industry.

Threat of Substitute Products

Although beer is the most common choice in the alcoholic beverage industry,
there are many substitutes available to consumers. Wine, spirits, and malt
beverages are the leading competition in alcohol sales, while bottled water and
soft drinks lead in the non-alcoholic sales. In the alcoholic sector, both the beer
and wine and brandy sales have increased, but beer sales have raised by a higher
percent each year.1 After all of this information is taken into account, Anheuser-
Busch still controls almost half of the market limiting the threat of substitutes to a
minimum.2

• Wine
• Spirits
• Malt Beverages
• Soft Drinks
• Water

1 www.findarticles.com
2 www.prism.gatech.edu
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Relative Price and Performance: Anheuser Busch tries to prevent loosing
sales to people searching for lower prices by offering a wide array of beers with
various prices. Anheuser Busch’s extensive amount of products meets every
customer demand. The variety of what they offer helps prevent customers form
purchasing another product. If the customer is looking for the best taste, lower
price, or image, Anheuser Busch covers all fronts.

Buyers’ Willingness to Switch: Many people have become loyal to Anheuser
Busch brands since they have been around for such a long time. Buyers’
willingness to switch depends on personal preference, availability of product, and
general intentions based on emotional state.

Bargaining Power in Input and Output Markets

Bargaining Power of Buyers:

Price Sensitivity: As discussed above, most regular beer drinkers have a brand
that they remain loyal to. However, when price is factored in, most consumers
would switch brands if the price is right. Knowing this fact forces the different
beer distributors to maintain a competitive price. 3

Relative Bargaining Power: A majority of consumers agree that all domestic
beers are similar in taste, which gives the power of consumers a boost. The fact
that they can switch between all of the different brands easily leads to competitive
pricing.4

Bargaining Power of Suppliers

3 www.prism.gatech.edu
4 www.prism.gatech.edu
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Bargaining Power: Since there are so many different suppliers as well as
substitute products, the power of suppliers is low.5

Summary of Competitive Forces

The alcohol beverage industry in is mainly differentiated but competition is still a
factor. It is a large, diversified market with several companies competing for their share
of the market. Anheuser Busch has obtained a major segment by utilizing first mover’s
advantage, applying economies of scale, and creating lasting relationships with
distributors. Exercising these resources, while being part of a saturated market, has
deterred many vendors from trying to contend. Anheuser Busch has limited substitute
beverages by diversifying its product line while keeping a strict focus on developing
brand loyalty. Anheuser Busch has kept prices low by regulating their bargaining power
over buyers like the aluminum and agricultural markets. Also since there are few
substitutes and vendors they can exemplify a large amount of bargaining power over the
suppliers. All of these competitive forces and the way Anheuser Busch utilizes each of
them allows it to be one of the most dominant beer manufacturers in the world. Further
explanation as to how the industry is differentiated is discussed in the accounting
analysis.

5 www.prism.gatech.edu
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Anheuser-Busch Five Forces Analysis

Degree of Actual and Potential Competition

Rivalry Among Threat of New Threat of Substitute
Ex isting Firms Entrants Products

• Ma rket consistently • Large economies of • Several substitute
growing scale products

• Only two or three • First mover • Offer a variety of

major competitors advantage allows to products to meet
• Of fers variety and establish name customer demands
extends market recognition • Consumer loyalty to

exposure • Able to maintain brand
• Ste ep learning curve close relationships
• Lo w excess capacity with distributors
and exit barriers • Various legal

barriers

High Low Low

Bargaining Power in Input and Output Markets

Bargaining Power of Bargaining Power of
Buyers Suppliers

• Price sensitive with • Few companies
undifferentiated • Few substitutes
products available to

• Strong bargaining customers
position • Product critical to
• Large number of some buyers’

suppliers relative to businesses
number of buyers

High Low

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