BUD - Fools Duel

[Sniper]

Bull Case (http://www.fool.com/news/commentary/2005/commentary05120101.htm)

Bear Case (http://www.fool.com/news/commentary/2005/commentary05120102.htm)

Bull Rebuttal (http://www.fool.com/news/commentary/2005/commentary05120103.htm)

Bear Rebuttal (http://www.fool.com/news/commentary/2005/commentary05120104.htm)

What's your opinion?

[Sniper]

Links to other recent forum threads on BUD...

The King of Beers (http://forumserver.twoplustwo.com/showflat.php?Cat=0&Number=2986492&an=0&page=8#Post 2986492)

What's up with BUD (http://forumserver.twoplustwo.com/showflat.php?Cat=0&Number=3879687&an=0&page=2#Post 3879687)

[Uglyowl]

Just no growth there, right now there. I would much rather be in Pepsi right now if I wanted a food/beverage company.

[AceHigh]

The beer market is declining (wine/distilled spirits growing), they are the biggest single brewer in America so little chance to grow much. I'm bearish on BUD.

[buffett]

Owl,
What is your estimated range of intrinsic values for BUD & PEP? Where do you expect their IVs to be in 5 years? And combining those two thoughts (and assuming that 5 years from now IV=stock price), what would your expected return be for each investment?

[buffett]

[ QUOTE ]
little chance to grow much

[/ QUOTE ]
[ QUOTE ]
Just no growth there

[/ QUOTE ]
There's that insidiously widespread falsehood again.

I wish I could elaborate my thoughts better than this, but because of my job I'm not allowed to comment on these specific companies.

[Uglyowl]

[ QUOTE ]
[ QUOTE ]
little chance to grow much

[/ QUOTE ]
[ QUOTE ]
Just no growth there

[/ QUOTE ]
There's that insidiously widespread falsehood again.

I wish I could elaborate my thoughts better than this, but because of my job I'm not allowed to comment on these specific companies.

[/ QUOTE ]


I base my comments on both what I see in the real world. What interests me is at a recent dinner at a training seminar I attended there were no Budweiser orders, but there was one Michelob light order. Budweiser used to be the beer of choice and I am afraid that it is no longer "cool" to drink Budweiser. Will the other products pick up the slack? Why worry about that when you can go with a striving company like Pepsi?

[AceHigh]

[ QUOTE ]
[ QUOTE ]
little chance to grow much

[/ QUOTE ]

[ QUOTE ]
Just no growth there

[/ QUOTE ]

There's that insidiously widespread falsehood again.

I wish I could elaborate my thoughts better than this, but because of my job I'm not allowed to comment on these specific companies.


[/ QUOTE ]

What's the point of posting if you aren't going to say anything? Unless you are auditioning for a job as Press Sec. of the U.S.

[Uglyowl]

[ QUOTE ]
Owl,
What is your estimated range of intrinsic values for BUD & PEP? Where do you expect their IVs to be in 5 years? And combining those two thoughts (and assuming that 5 years from now IV=stock price), what would your expected return be for each investment?

[/ QUOTE ]

By the way my investment strategy is very very simple.

I see Pepsi has performed well for the past five year with solid earnings gains and the momentum is continuing unlike Bud who is currently in a rut.

I am not smart enough to figure out if a company is going to turn things around so I search for companies that are priced at a discount that are growing at a reasonable rate.

Do I think Pepsi is super cheap at this moment? No, but in trying to stay diversified it fills a nice niche.

I don't expect to be super rich, but expect to hum along with 10-15% gains/ annually.

[buffett]

[ QUOTE ]
if you aren't going to say anything?

[/ QUOTE ]
Hi, AceHigh
Here is a link (http://forumserver.twoplustwo.com/showflat.php?Cat=0&Board=stocks&Number=4056013&Sea rchpage=1&Main=4051072&Words=insidiously&topic=&Se arch=true#Post4056013) to the original post I made that included this phrase. I think it's a big and widespread problem, so I was trying to draw attention to it by saying it in one thread and repeating it in another.
For this specific duo, let's say Stock1 has an intrinsic value of $40 and is currently selling for $35 in the market. In 5 years we expect its intrinsic value to be in the $60-70 range. This represents a growth rate (of intrinsic value) of 8.5-12%, which is pretty good. Ignoring dividends, if we buy it today at $35, we will realize an annualized return of 11.5-15%, even better.
Let's say Stock2 is also selling for $35 but has an intrinsic value of $55. If its intrinsic value grows to be $65-75 five years from now, it will have grown 3.5-6.5% per year. Not too exciting. But if we buy it at $35 and the gap between its stock price and intrinsic value closes, we will have earned between 13-16.5%.
That's all I'm trying to say about BUD vs. PEP. PEP may have higher growth, but that's not enough to imply that its stock is therefore a better buy. We have to also know what its current intrinsic value is, and so far nobody in this thread has given their estimates for the difference between intrinsic value and stock price for these two stocks.
(Cisco, by the way, has had fabulous growth over the last five years. Its revenue and earnings are now much, much higher than they were five years ago. It stock price, though, has declined about 75%.)

[Sniper]

[ QUOTE ]
I wish I could elaborate my thoughts better than this, but because of my job I'm not allowed to comment on these specific companies.

[/ QUOTE ]

I'm sure you must have posted it before, but can you remind us where you work? Thx

[buffett]

[ QUOTE ]
where you work?

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A small Registered Investment Advisor near New York. We're mainly a non-custodial manager of separate accounts for individuals, institutions, pension plans, etc.; but we also have two hedge funds. I'm not allowed to post about securities we invest in or may be interested in investing in.

[Uglyowl]

I appreciate everyone's thoughts.

The way I look at (an amateur's view) is the P/E based on next years earnings is:

BUD: 17.1
PEP: 20.4

That being said BUD has marginal revenue growth and shrinking margins with no turn around that I have heard about in sight, while Pepsi should have 10-13% EPS growth.

That is what may seperate me from the "pros", but I have gotten decent growth over the past few years and expect to continue to do so.

I understand your CSCO example, but at a P/E of 80 a few years back, it is comparing apples to dump trucks.

[AceHigh]

[ QUOTE ]
Here is a link to the original post I made that included this phrase. I think it's a big and widespread problem, so I was trying to draw attention to it by saying it in one thread and repeating it in another.

[/ QUOTE ]

But your post was so cryptic it didn't do that, at least I didn't understand it.

Yes I like high growth stocks, among others, but that's not my sole criteria for buying. I also use intrinsic value when picking stocks.

I thought it was understood when we said we like growth that included the phrase "all other things being realitivily equal".

If you look at BUD it's forward p/e is almost identical to it's current p/e. I like stocks that are going to perform in the near future. So I don't like BUD.

FWIW, I have a current intrinsic value of ~33 on BUD with it's price being ~43.

[buffett]

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we like growth ... "all other things being realitivily equal"

[/ QUOTE ]
I'm glad we've found some common ground /images/graemlins/smile.gif...I totally agree.

[ QUOTE ]
I have a current intrinsic value of ~33 on BUD

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Can you show us your math?

[AceHigh]

I used Quicken's calc:

initial earnings of $1.97 billion grow at a rate of 8.42%, and we discount those future earnings at a rate of 15.00%, we arrive at a net present value for the company's next 10 years of earnings of $14.5 billion. To account for potential earnings beyond the 10th year, we estimate a growth rate of 6.00%, a discount rate of 12.00%, and we arrive at a continuing value of $19.3 billion. To complete the calculation we add these two figures together, subtract the long-term debt for BUD ($8.01 billion), and divide by the outstanding shares (776 million) to get a per share intrinsic value of $33.18.

[Sniper]

Here's S&P's thoughts on BUD leading to 3 star (Hold) rating and a 12 month price target of 45...

[ QUOTE ]
Our 12-month target price of $45 blends our DCF and P/E analyses, giving more weight to the latter. Our DCF model calculates a $53 intrinsic value using a 9.0% cost of capital and a 2.4% five-year growth rate. Applying a below historical average P/E ratio of 16X to our 2006 EPS estimate of $2.68, we get a $43 value.

Risks to our recommendation and target price include market share declines, due to aggressive marketing by competitors, particularly in the wine and spirits categories, for first-time drinkers.

[/ QUOTE ]

Also worth noting, Berkshire holds about 45 million shares of BUD!

[buffett]

Thanks for the math breakdown. What led you to choose 15% and 12% for your discount rates? Do you use similar rates for other companies we've discussed (JCOM, GOOG, DNA, etc.)?

[AceHigh]

Discount rate is bond rate + risk. Bond rate is 6% and risk is 9% for BUD (9% is lowest). Newer companies get higher risk rates, so the other companies all have higher discount rates than BUD. Then all companies default to 12% after 10 years. This is the default discount rate for Quicken and I always take the default rates with this tool for discount rate.

[buffett]

I follow (and agree with) the framework but not the details. It seems like you might be double-counting some "risk," since the 10-year treasuries are yielding 4.5% but you're starting from a base of 6.0%.

Also, I don't get where the 9% comes from and why it is the "lowest."

For comparison purposes: the Longleaf folks discount at inflation+10%, Mr. Buffett has been using ~10% post-tax/~13% pre-tax as his floor discount rate in the current low-rate environment, and CAPM would say to use 4.5% plus some multiple of "risk premium" which I guess would work out to around 11% or so. So the 15%/12% thing to me seems excessive; to show others who may be following along how wide the swings of DCF can be...if you bring those down to 10%, the intrinsic value goes to $74 per share.

[AceHigh]

It's my favorite intrinsic value calculator, YMMV.


Found this in Quicken help:

• The bond rate: Your investment could grow risk-free at the bond rate. You'll need to beat this rate to make your investment worthwhile. Matching the bond rate also means automatically that your money will grow at or above the rate of inflation; if you fail to keep up with inflation, the purchasing power of your investment will dwindle over time.

• A "risk premium": You're probably looking to realize a certain percentage gain over and above the inflation and bond rates to make assuming the investment risk worth your while. The size of this risk premium is up to you.

Add the bond rate and risk premium together to arrive at a discount rate suitable to your investment expectations. Enter the discount rate into the text box. If you wish, you can leave the discount rate set to the default.

To calculate the default discount rate, Stock Evaluator uses a basic discount rate of 15% (assuming a 6% bond rate and 9% risk premium) for the first 10 years. After that, a lower discount rate of 12% is used. Assuming that younger companies pose a greater risk than older, more established companies, Stock Evaluator adjusts the default discount rate according to the age of the company (determined by the number of years of financial reports available) to allow for the attendant risk, as follows:
• For 9 or more years, no risk adjustment

[DiamondDave]

Growth is only one component of value.

The company's stock market value is $33.4 billion. It returns $2.6 billion per year to shareholders via stock repurchases and dividends. That's a 7.8% rate of return right there.

When you consider that the value of assets in place will increase at the rate of inflation and that unit volume will increase (slowly) over time, it looks like a (nominal) rate of return of 11-12% over the long haul is pretty much a slam dunk.

And it's not as if shareholders need to bear a lot of risk to earn that return. Market share leadership, brand name recognition, partnerships with key equity investees, the best distribution network in the biz, shareholder-oriented management that displays skill and restraint in deploying capital, etc etc.

[Uglyowl]

[ QUOTE ]
When you consider that the value of assets in place will increase at the rate of inflation

[/ QUOTE ]

Since when do assets increase in value?

Assets decrease in value through wear and tear and/or becoming obsolete.

[DiamondDave]

If retained earnings are used to keep the plant and equipment in working order, the beer-making capacity of BUD's capital stock should stay about the same as time passes. And the nominal value of that plant & equipment will increase because the nominal price of its output (beer) will increase.

Obviously, vats used to make beer will eventually wear out. But I would hazard a guess that they will retain their usefulness to a greater degree than, say, the machines used to make panels for Dodge trucks. It's not as if all capital equipment wears out at the same rate, whatever GAAP rules on depreciation may say.