The Wrong Beer for Warren Buffett

Scott Monday is a big Warren Buffett fan. So when it was disclosed last April that the Oracle of Omaha, the world’s second richest man with an estimated net worth of $40 billion, had acquired over the prior year 5.7%, or 44.7 million shares, of Anheuser-Busch, Mr. Monday immediately bought 1,500 shares of the brewer’s stock, as well, at around $48.He wasn’t alone. Other investors, impressed by Mr. Buffet’s investment prowess, also ran after Bud, driving it up nearly 7% to $48.25.Alas, it wasn’t one of Mr. Buffet’s finer investment moments. The stock was down in 2004, down again in 2005, and it’s flat so far in 2006. In fact, pre-Mr.Buffett, the shares were also a dog, having fallen about 22% over the past decade. They closed yesterday at $43.30.In a recent e-mail, Mr. Monday writes, “Dan, I know everyone thinks Mr. Buffet is an investment genius and I do, too, but he laid an egg with Budweiser (the most famous of Anheuser-Busch’s 30 beers). I am one of his big fans, but Bud is a bomb. I tried calling him, but I was told he doesn’t accept calls from individual investors. I was going to sell my Bud, but my broker told me that Bear Stearns just upgraded it. What would you do?”For starters, the Bear Stearns upgrade was pretty lukewarm. Analyst Carlos Laboy only raised his rating to a “peer perform” (meaning he expects the stock to perform in line with other brewers), rather than an outperform. Why such an uninspiring upgrade? The analyst points out that pricing remains a key restraint in the short term, likewise, the P/E to growth ratio is not great. Further, Mr. Laboy expects meager profit growth this year of just 4%.In addition, if Mitchell Corwin, an analyst at Morningstar and a Bud bear, is on target with his thinking, the stock will likely remain a dud. To coin a phrase from its competitor, he observes, Bud may still taste great, but these days it’s a lot less filling. The analyst, who is wary of the company’s long-term prospects, regards its distributor base as an insufficient advantage in a tough beer market and its overseas story as not compelling. A key competitive advantage, such as the firm’s exclusive distribution base, he points out, doesn’t do much good if no one wants what you’re distributing.His long-term concerns include waning interest in the company’s beer brands and the fact that the domestic beer industry is in a secular state of decline. Mr. Corwin also notes that changing socioeconomic, lifestyle, and demographic trends all point to further growth in premium wines and spirits. He adds that it’s not just baby boomers who are seeking more sophisticated beverages, but younger consumers are also turning up their noses at Budweiser. He also feels many of Anheuser’s brands simply don’t resonate as premiums.The analyst observes that even if consumption trends improve in the domestic beer market, cutthroat pricing may not. He notes that rival SABMiller, through its aggressive advertising, has forced Anheuser to drop prices and take less profit on Bud, not surprising, given the contentious rivalry between the two. And even if SABMiller is somehow swayed to ease up on its pricing, Mr. Corwin notes that other competitors, such as Molson Coors (which is still reeling from a much-maligned merger last year) may get desperate to show it can play with the big boys.What about overseas, where beer consumption is growing in many markets? The analyst says he would be willing to give Anheuser the benefit of the doubt on the domestic front if he felt the company offered a good international story. But other than Mexico, Bud hasn’t staked out a dominant position anywhere. He thinks the company’s investment in China could prove lucrative, but it may take a decade to find out.The bottom line: A famous brand can often be a bum investment. Mr. Buffett might be better off putting his beer money elsewhere.

The Wrong Beer for Warren Buffett

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