THOMAS VILLALTA
CHIEF INVESTMENT OFFICER
JONES ASSET MANAGEMENT

STOCK: Anheuser-Busch Companies
SYMBOL: (NYSE: BUD)
PRICE: $40.75 (as of 4 p.m. yesterday)
52-WEEK RANGE: $40.15-48.65
MARKET CAPITALIZATION: $31.64 billion

Tom Villalta is the Chief Investment Officer at Jones Asset Management, a money management firm based in Texas. He explains to David Dalley of The New York Sun why he likes Anheuser-Busch and why now is the time to get back into big-caps.

What do you like about BUD?

It’s a market leader, a household name, and it has approximately 48% of the local beer market. It has some very distinguishable brand names, plenty of exposure, and has been around for a long time. We’re seeing a lot of value these days in a lot of big-cap stocks as opposed to small- and medium-size companies. A lot of the larger-cap issues, especially the better known names like Microsoft, Intel, Pfizer, and Disney, are trading on low relative valuations. They’re all stocks we currently own.

What do you mean by low relative valuation?

When we value stocks we look at what we term driver ratios. Return on equity drives price-to-book ratios, for example. Expected growth and earnings tend to drive P/E ratios. A metric that’s fairly common and that we look at is the PEG ratio, which relates P/E to growth. In doing our filtering, we’re finding that for some of the very large-cap issues, their prices are much more reasonable relative to their growth prospects than the mid-caps and the small-caps.That’s what we’re seeing with BUD.

The stock has declined over the last year, and didn’t do much in the years before that. Why?

Last year wasn’t a good year for them and we knew that when we purchased in December.But it’s a stock with strong fundamental value. If you look at the stock price, it hasn’t changed much from what it was at five years ago, and that’s also true of other big-caps like Microsoft and Pfizer. In the meantime you’ve had net sales go from about $12.5 billion to over $15 billion in 2005, and a dividend yield of 2.6%.

What we really look at is the return to equity holders. Apart from dividends, BUD has made big share repurchases over the last couple years. Last year’s dividend payout, almost $800 million, and $1.7 billion in repurchases equates to a return to shareholders of about $2.4 billion – almost three times the dividend yield. We like it when a company returns a lot of cash to shareholders.

So why hasn’t the share price gone up?

The major factor was the beer market in 2005, which was very lackluster. Income and revenue grew from 2004 to 2005, but then stagnated in 2005.

Beer consumption has been flat in the last few years, and they haven’t succeeded in capturing enough market share. But fundamentally, the intrinsic value of this company is high relative to its price. Using our model, we believe the market price implies an earnings growth rate of between 0% and 1%.This underestimates BUD’s real value. We expect something more along the lines of 6% to 8% over the next five years.