Evaluation and Analysis of:

Performed by:

Tech Investments
Market Recommendation: Hold
As of December 3rd, 2004

Ticker Symbol:
S&P 500 Price
52 week range
Market Cap

BUD
50.79
49.42-54.74
40.13B

Sales
SHS OS
Div. Yld

13,279B
790.07M
1.94%.

A-B Industry
ROE
81.21 63.34
P/E
18.77 18.87
P/B
14.51 11.33
LT D/E
2.91 2.33

Valuations (As of Nov.1st, 2004)

Actual Price
AEG Model
55.04
RI Model
83.97
FCF
64.19

EPS

2003
1.72

Beta
Stnd. Dev.

2004
1.70

50.71

2005 2006
1.75(e) 1.85(e)
-.07
.1881

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.

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
Chinas 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-Buschs 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 Buschs 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

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 Buschs 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-Buschs 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 Chinas 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.

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 AnheuserBuschs 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.

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

ANHEUSER BUSCH

BUD

Price Change

Market Cap

P/E

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

Companhia de Bebidas das Amricas

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.

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, AnheuserBusch still controls almost half of the market limiting the threat of substitutes to a
minimum. 2

Wine
Spirits
Malt Beverages
Soft Drinks
Water
1
2

www.findarticles.com
www.prism.gatech.edu

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 Buschs 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
4

www.prism.gatech.edu
www.prism.gatech.edu

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 movers
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.

www.prism.gatech.edu

Anheuser-Busch Five Forces Analysis

Degree of Actual and Potential Competition
Rivalry Among
Existing Firms

Threat of New
Entrants

Market consistently
growing
Only two or three
major competitors
Offers variety and
extends market
exposure
Steep learning curve
Low excess capacity
and exit barriers

High

Threat of Substitute
Products

Large economies of
scale
First mover
advantage allows to
establish name
recognition
Able to maintain
close relationships
with distributors
Various legal
barriers

Several substitute
products
Offer a variety of
products to meet
customer demands
Consumer loyalty to
brand

Low

Low

Bargaining Power in Input and Output Markets

Bargaining Power of
Buyers

Price sensitive with

undifferentiated
products
Strong bargaining
position
Large number of
suppliers relative to
number of buyers

High

Bargaining Power of
Suppliers

Few companies
Few substitutes
available to
customers
Product critical to
some buyers
businesses

Low

10

Competitive Advantages
Key Success Factors: Anheuser-Buschs core competencies focus on both
bottling and their entertainment operations. They have been a leader in the industry for
150 and have the two top selling brands. Budweiser is number one, and Bud Light
finishes second. Anheuser-Busch has become a name synonymous with quality beer at a
competitive price. While being seen as a leader in the American industry, AnheuserBusch has also invested in international breweries in Latin America. These acquisitions
helped to strengthen their international brand strength world-wide. In addition to being
one of the largest breweries in the world, Anheuser-Busch owns and operates many
packaging facilities throughout the nation. Another way that Anheuser Busch maintains
competitive advantage is through product differentiation. While their product is similar
to its competitors product, Anheuser Busch uses other tactics to differentiate its product.
These tactics include concentration on product quality and product variety. While other
competitors only have a few different brands of beer, Anheuser Busch has almost thirty
different drinks, varying from beer to malt beverages, and has even introduced an energy
enhancing beverage. Another way of differentiating its product is through delivery of
product and customer service. Anheuser Busch strives to deliver its product shortly after
it is produced, while other competitors store their product for periods of time after it is
produced. By consistently providing timely delivery of a fresh product, Anheuser Busch
has added value to its product without even altering the way it is made. Anheuser Busch
has also increased customer recognition and name association of its product by providing
additional venues to distribute their product. They have created an empire of amusement
parks and sporting venues that generate more opportunities to market and distribute their
product. Competitors have tried to imitate this strategy, but have not been able to
compete on the same scale as Anheuser Busch. Through their marketing team the Busch
Media Group, a subsidiary of Anheuser Busch the company has maintained a large
portion of the alcoholic beverage industries market by appealing to its customers in a
wide variety of commercials using humor, sex appeal, and recognizable symbols and
slogans. By using Real Men of Genius, symbols like the Clydesdale horses and
phrases like The King of Beers Anheuser Busch has targeted markets from young to

11

old while increasing brand name recognition. These tactics of differentiating their
product have provided a valuable competitive advantage for Anheuser Busch.
Anheuser Busch has a unique way of connecting to its customers by following
changes in trends. Anheuser Bush has created a few different types of alcoholic
beverages that conform to todays health conscious way of life. It was one of the first to
develop a low carb beer, Michelob Ultra, which started a new trend amongst beer
drinkers. Born on dating, and their newest innovation, day fresh beer, are other tactics
that Anheuser Busch has employed to achieve a competitive advantage, and to stay
current with customers wants and needs. This has caused customers to associate
freshness with great taste.
Anheuser Busch seeks to sustain and continuously build upon their competitive
advantages. Anheuser Busch realizes that they offer high quality products therefore
relying on new marketing schemes to achieve customer loyalty and brand recognition.
The integrity and success of Anheuser Busch relies on unsurpassed quality, an innovative
approach, and diversifying all of their relationships.

Accounting Analysis

Quantitative Measures and Indicators

To effectively analyze the past performance of Anheuser Busch, quantitative

measures and indicators must be examined. The sales manipulation diagnostics shows
the behavior of sales relative to cash from sales, accounts receivable, and inventory. The
core expense manipulation diagnostics shows earnings relative to expenses.

12

Sales Manipulation Diagnostics:

Net Sales/
Cash from
Sales
Net Sales/
Net Accounts
Receivable
Net Sales/
Inventory

1999

2000

2001

2002

2003

1.06

1.05

1.05

1.05

1.05

18.91

20.42

20.79

21.52

21.13

19.1

20.16

21.82

24.1

24.08

These ratios show that net sales to cash from sales remained steady. Net sales to
accounts receivables increased steadily, which means sales increased more than accounts
receivables. The net sales to inventory also increased, which indicates the company
holding fewer inventories. These are both favorable results.

Core Expense Manipulation Diagnostics:

1999

2000

2001

2002

2003

Sales/ Assets

.94

.88

.93

.96

.96

CFFO/ OI

.91

.9

.87

.93

.93

CFFO/ NOA

.18

.18

.18

.20

.21

13

Sales to assets varied slightly, but ended in an increase. This could reflect the increase in
sales relative to assets. Cash flows from operations to operating income went down for
two years, and then increased significantly in 2002. This reflects the large increase in
cash flows from operations. The final ratio showed little or no change until the last two
years.

% Changes in Measures:

2000

2001

2002

2003

Net Sales/
Cash from
Sales
Net Sales/Net
Accounts
Receivable
Net Sales/
Inventory

-.94%

No change

No change

No change

7.99%

1.81%

3.35%

-1.81%

5.55%

8.23%

10.45%

-.08%

Sales/ Assets

-6.38%

5.68%

3.23%

No change

CFFO/OI

-1.1%

-3.3%

6.9%

No change

No change

No change

11.11%

5%

CFFO/ NOA

14

*www.anheuser-busch.com

Structure of the Formal Accounting Analysis

Qualitative Measures

Step One: Identify Key Accounting Policies

Anheuser Buschs competitive strategies of differentiation and cost leadership determine
its key success factors. By concentrating on these key success factors, Anheuser-Busch
has identified and set guidelines on all of its major accounting policies.
The managers decisions on these key accounting policies are as follows:

Revenue Recognition: Revenue recognition policies comply with

SEC Bulletin No. 101. Revenue is recognized when legal title transfers or
services have been rendered. This method is based on the accrual
accounting method.

Principle of Consolidation: Consolidated financial statements include

the company and all subsidiaries. The equity method of accounting is
applied for investments in which majority control can be exercised, and
the cost method is used for all other investments.

15

Cash: Cash is classified as demand deposits, investments in short term

marketable securities with maturities of 90 days or less, and cash in banks.

Intangible assets and Goodwill: Accounting for goodwill follows the

adoption of FAS 142. This rule was adopted on January 1, 2002. If assets
meet criteria for distinct asset classification than they are either Goodwill
or intangible assets. Goodwill and other intangible assets amount to
about $1.3 Billion. Intangibles can be added or removed from Goodwill.

Inventories: Valued at the lower of cost or market. Inventories are

valued using the LIFO method for the majority of inventories and the
average cost method for the remainder.

Fixed Assets and Depreciation: Fixed assets are valued at original cost
minus accumulated depreciation. Costs of maintenance and repairs are
expensed as incurred. Depreciation is calculated using the straight-line
method based on varying weighted averages of useful life.

Derivatives: Accounting for derivatives follows FAS No. 133. The

company uses derivatives to reduce the vulnerability to the volatility in
commodity prices, interest rates, and foreign exchange rates.

Income Taxes: Anheuser-Busch uses federal, state and foreign income

tax laws to reduce current taxes payable. Accounting for deferred taxes
follows FAS No. 109.

Research and Development: Expensed as incurred; not reported as

material for any period.

Stock Option Plans: Options generally have a vesting period of 3 years

with a maximum term of ten years. Accelerated ability to exercise options
is applicable if change in control, merger, sale of majority of assets, or
complete liquidation shall occur.

Advertising and Promotional Costs: Production costs expensed after

first time ad is shown. Advertising media costs are expensed as occur.

Pension Plans: The company has pension plans covering mostly all of
its regularly employees. The company makes required minimum

16

contribution of $71 million, for its defined benefit pension plan.

Additional contributions can be made to enhance the funds performance.

Special Purpose Entities: We were unable to find any related parties or

special purpose entities.

Anheuser Buschs key accounting policies are not all equally important. Revenue
recognition and intangible assets are probably the most important. This is due to the fact
that Anheuser Busch has a substantial amount of revenue, and its goodwill and intangible
assets are a vital part of its products. Advertising is also an important policy since
Anheuser Busch spends a great amount of money on this.

Step Two: Assessment of Degree of Potential Accounting Flexibility

Anheuser-Busch has a significant amount of flexibility in choosing their key
accounting policies. One of the key accounting policies that is necessary to AnheuserBusch is in regards to their valuation of inventory. Anheuser-Busch is able to manage its
reported numbers by changing methods of valuing inventory. Inventory is accounted for
using the LIFO and average cost methods for all of Anheuser-Buschs business segments.
If the average cost method was used for Anheuser-Buschs entire inventory, the value of
total inventories would have been $110.0 million higher than the current method values.
Another form of accounting flexibility is in the classification of goodwill. AnheuserBusch adopted FAS 142 and reclassified certain intangible assets into goodwill because
they did not meet the criteria for separate asset classification. They also reclassified out
of goodwill certain beer distribution rights that met criteria for separate asset
classification. The ability to change the amount of goodwill that should be amortized
each year is an example of how Anheuser-Busch uses its accounting flexibility to
manipulate certain financial data. These uses of accounting flexibility have a large
impact on the appearance of Anheuser-Buschs financial statements, but all changes in
accounting policy are legal. Anheuser-Busch has accounting flexibility to the extent of
the options provided under SEC regulation, but this flexibility does not permit managers

17

to manipulate financial data outside of the letter of the law. They make choices on their
policies of amortization of goodwill, revenue recognition, inventory valuation, and many
other accounting policies, but their flexibility does not extend past the boundaries set by
the SEC.

Step Three: Evaluation of Accounting Strategy

Anheuser-Busch has been very expressive of the fact they use their accounting
flexibility to show their true economic condition, rather than using their flexibility to hide
accounting distortions. Anheuser-Busch follows a policy set forth by the SEC which
entails a critical accounting policy where there are choices amongst alternatives in
coordination with U.S. generally accepted accounting principles. By choosing a different
alternative it will undoubtedly produce differed results. Anheuser-Busch has
communicated the financial information in a way that depicts accurately the economic
status of the company but remained within the specified confines of GAAP. We find that
overall Anheuser Busch is more conservative with its accounting strategy. We found no
special purpose entities, indicating that they are not trying to hide anything.

Industry Norms: This industry is very developed and only has a few true competitors.
Anheuser Busch and Miller do a mediocre job in disclosing accounting and financial
information, while Coors seems to offer easier access to accounting and financial
documents. Coors has a more conservative accounting policy, similar to that of
Anheuser Busch. All three firms are very similar about their advertising and promotional
costs. According to GAAP, media costs are expensed when they occur. They are all
similar in handling derivatives; they all must conform to the FAS 133 Accounting for
Derivatives and Related Hedging Activity 6 . All three companies use defined benefit
pension plans. Millers goodwill is amortized unless it has an infinite useful life. Coors
and Anheuser Busch both must conform to FAS 142, causing them to have comparable
accounting practices. They all use the accrual accounting method, making their

Anheuser-Busch Companies, Inc., Published by the Securities and Exchange Commission

18

accounting practices very similar. They are all alike in their accounting practices; this is
perhaps due to the fact that they are all related companies.

Revenue Recognition: Anheuser-Busch has chosen a method for recognizing revenues

that is fairly simple and is in the boundaries of the SEC Staff Accounting Bulletin No 101
Revenue Recognition in Financial Statements. 7 The company uses the accrual method
of accounting in that it only records revenue when it has the exchanged the good or
completed the service. This method is the industry norm, since there are no other
alternative ways to record revenues under GAAP.

Equity Method Accounting: The equity method of accounting is utilized by Anheuser

Busch when it can control an investee company from around 20% to 50% of the
investments are owned by the company. 8 Accrual accounting is used since cash is only
recognized when the investee company redistributes it. These investments must be
accounted for on an individual basis, because there is a high degree of variance and no
definite return from these beneficiaries. Therefore, this is the only agreeable accounting
method.

Derivatives: Anheuser Busch must conform to the FAS 133, Accounting for Derivatives
and Related Hedging Activity for their hedging and derivative activities. 9 The only
other way of recording this would introduce unwanted instability to Anheuser Buschs
reported earnings.

Advertising and Promotional Costs: Advertising being a large part if Anheuser Buschs
operations are expensed the first time the ad is shown. Advertising and media costs are
all expensed when they occur. While, promotion costs are a reduction of net sales when
they happen, this method is required by GAAP.

Anheuser-Busch Companies, Inc., Published by the Securities and Exchange Commission

Anheuser-Busch Companies, Inc., Published by the Securities and Exchange Commission
9
Anheuser-Busch Companies, Inc., Published by the Securities and Exchange Commission
8

19

Pension Costs: Under FAS 87 Anheuser Busch must use three assumptions when
computing estimated annual pension expense. 10 Anheuser Busch must use determined
discount rates, while they must estimate the future rates of return. These help Anheuser
Busch determine a more accurate annual depreciation expense.

Cash: Cash is considered money in banks, demand deposits, short term investments,
orders already placed, as well as short term accounts receivable. They are accounted for
by accrual accounting.

Intangible assets: Anheuser Busch has goodwill related to both consolidated business
and equity method investments. 11 The company derives goodwill by dividing the excess
cost of an acquired business over the fair market value of its net assets. Anheuser-Busch
has intangible assets in both foreign and domestic beer distributors. The company has
integrated FAS 142 but found that none of its existing intangible assets were in violation.

Accounting Discretion to Manage Earnings

The company accounts for employee stock options using the intrinsic value method in
accordance with APB 25, Accounting for Stock Issued to Employees. 12 Since the
company uses the intrinsic value method they have not realized any expense related to the
issuing of its stock to employees, due to the fact that the stock is issued at fair value of
the time issued. Anheuser-Busch goes into great detail on what the financial records
would show if they used the alternative FAS 123, since this is required by the SEC.

Policy Changes

10

Anheuser-Busch Companies, Inc., Published by the Securities and Exchange Commission

Anheuser-Busch Companies, Inc., Published by the Securities and Exchange Commission
12
Anheuser-Busch Companies, Inc., Published by the Securities and Exchange Commission
11

20

Anheuser-Busch made no changes in its accounting policies since the change in 2002 for
goodwill required by the FASB.

Step Four: Evaluation of the Quality of Disclosure

Anheuser Busch takes pride in the disclosure of the firms accounting quality and their
financial statements. While GAAP requires a minimal amount of disclosure, Anheuser
Busch goes beyond this in order to inform its investors and the public about its
operations.
In the letter to the shareholders, Anheuser Busch clearly presents information
such as their return over past years relative to the S&P 500 index. They also briefly
explain the companies break down, such as domestic and international beers, packaging,
entertainment operations, and community service. Anheuser Busch describes the firms
industry conditions and their future plans.3.

Anheuser Buschs footnotes summarize the firms revenue and expense

recognition policies, stating that it complies with SEC staff accounting Bulletin No. 101,
Revenue Recognition in Financial Statements. They also provide brief information on

21

other accounting principals and policies, as well as notes to consolidated financial

statements.2.
The Management Discussion and Analysis summarizes factors affecting the
company, it also explains the reasons behind their performance changes. It also explains
the operating results of the company stating its outstanding performance in the year 2002,
delivering 14% EPS growth. There is an extensive amount of sales comparison from
year to year. They failed to disclose any information that has a negative connotation
toward the company. 1.
Anheuser Busch provides adequate and quality information to its shareholders and
the public. They do this by creating valuable and factual information that is released to
everyone. Anheuser Busch maintains the quality of their disclosures by offering many
different resources pertaining to the firms operations, accounting policies, and future
expectations of the company

Step Five: Identification of Potential Red Flags

Anheuser Bush has had changes in its accounting policies, but when doing so they
accurately describe why they have made this change, usually in the footnotes. For
example, according to the Notes to Consolidated Financial Statements provided by
Anheuser Busch,

In 2001, goodwill was amortized to expense over a period of 40 years. Effective

January 1, 2002 Anheuser Busch adopted FAS No. 142, Goodwill and Other
Intangible Assets, and was therefore required ceasing the amortization of
goodwill existing at the adoption date. In lieu of amortization, consolidated
goodwill and other intangible assets are now reviewed for impairment at least
annually, with ongoing recoverability based on applicable operating unit
performance and consideration of significant events or changes in the over all
business environment.

Anheuser Busch does a good job of disclosing their changes in accounting policies; they
also give a good explanation as to why they made the changes.
22

There have been increases in accounts receivable and inventories, but these are
explained by an almost equal increase in sales. There has also been a steady gap between
their reported income and its cash flows from operations. Anheuser Busch has used Price
Waterhouse Coopers for many years, leading us to believe that they dont opinion shop
to better their financial statements.
Anheuser Bush has been performing at an optimal level which creates less of a
reason to practice questionable accounting. The company has disclosed all important
information related to the firms year to year activity.

Step Six: Undo Accounting Distortions

After reviewing all pertinent financial data of Anheuser-Busch, we have concluded that
the financial reports display transparency in the quality of disclosure. There was no
indication of misleading activity within the financial reports. The statement of cash flows
was concurrent with the disclosures in the footnotes, and provided an accurate alternative
benchmark for the accrual method of accounting. The flexibility of accounting methods
were apparent in the financial statements of Anheuser-Busch, but the flexibility was not
used to distort the true performance of the company. All methods of accounting
flexibility were clearly explained in the footnotes to the financial statements. Being that
no accounting distortions were revealed, there is no need for any adjustments or
corrections to the financial statements.

Financial Statement Ratio Analysis

In order to evaluate the financial condition of a company, the financial statements
must be analyzed and interpreted. The following tables evaluate financial management
performance, show emerging trends, and help explain relationships. The liquidity ratios
display the cash equivalence of assets and the firms ability to maintain enough near cash
resources to meet debt obligations. The results show generally a favorable change in
liquidity. Quick asset and current ratio did not show any significant change. Accounts
receivable turnover and inventory turnover both show favorable improvement. Each days

23

supply decreased with an improvement in efficiency. The working capital turnover is not
applicable because working capital is negative.

Liquidity Analysis
1999
Current Ratio
1,600,600/
(CA/CL)
1,951,000=
.82
Quick Asset Ratio 781,100/
(QA/CL)
1,951,000=
.4
Accounts
13,914,500/
Receivable
629,000=
Turnover
(Sales/AR)
22.12
Days Supply of
365/
Receivables
22.12=
(365/AR TO)
16.64 days
Inventory
7,445,600/
623,800=
Turnover
(COGS/INV)
11.94
Days Supply of
365/
Inventory
11.94=
(356/INV TO)
30.57 days
Working Capital
13,914,500/
Turnover
-350,400=
(Sales/WC)
N/A

2000
1,547,900/
1,675,700=
.92
760,300/
1,675,700=
.45
14,534,200/
600,400=

2001
1,550,400/
1,736,500=
.89
783,500/
1,736,500=
.45
14,973,000/
620,900=

2002
1,504,700/
1,787,700=
.84
819,300/
1,787,700=
.46
15,686,800/
630,400=

2003
1,630,300/
1,857,200=
.88
860,500/
1,857,200=
.46
16,320,200/
669,400=

24.2
365/
24.2=
15.08 days
7,829,900/
608,300=
12.87
365/
12.87=
28.36 days
14,534,200/
-127,800=
N/A

24.1
365/
24.1=
15.15 days
7,950,400/
591,800=
13.43
365/
13.43=
27.18 days
14,973,000/
-186,100=
N/A

24.88
365/
24.88=
14.67 days
8,131,300/
563,600=
14.43
365/
14.43=
25.29 days
15,686,800/
-283,000=
N/A

24.38
365/
24.38=
14.97 days
8,449,100/
587,500=
14.38
365/
14.38=
25.38 days
16,320,200/
-226,900=
N/A

The profitability ratios evaluate operating efficiency, asset productivity, rate of return on
assets, and rate of return on equity. Basically, the results show an increase, or little
change in the ratios.

Profitability Analysis
Gross Profit
Margin
(Gross
profit/Sales)
Operating
Expense
Ratio (Op.

1999
(13,914,500
-7,445,600)/
13,914,500=
46%
9,592,600/
13,914,500=

2000
(14,534,2007,829,900)/
14,534,200=
46%
10,004,700/
14,534,200=

2001
(14,973,0007,950,400)/
14,973,000=
47%
10,181,500/
14,973,000=

2002
(15,686,8008,131,300)/
15,686,800=
48%
10,586,700/
15,686,800=

2003
(16,320,2008,449,100)/
16,320,200=
48%
10,947,400/
16,320,200=

24

Exp./Sales)
Net Profit
Margin
(NI/Sales)
Asset
Turnover
(Sales/Total
Assets)

69%
1,402,200/
13,914,500=
10%
13,914,500/
12,640,400=

69%
1,551,600/
14,534,200=
11%
14,534,200/
13,072,700=

68%
1,704,500/
14,973,000=
11%
14,973,000=
13,944,900=

67%
1,933,800/
15,686,800=
12%
15,686,800/
14,119,500=

67%
2,075,900/
16,320,200=
13%
16,320,200/
14,689,500=

1.1

1.1

1.07

1.1

1.1

Return on
Assets
(NI/Total
Assets)
Return on
Equity
(NI/Equity)

1,402,200/
1,551,600/
12,640,400= 13,072,700=

1,704,500/
13,944,900=

1,933,800/
14,119,500=

2,075,900/
14,689,500=

11%
1,402,200/
3,921,500=
36%

12%
1,704,500/
4,061,500=
42%

14%
1,933,800/
3,052,300=
63%

14%
2,075,900/
2,711,700=
77%

12%
1,551,600/
4,128,900=
38%

Capital structure refers to the sources of financing used to acquire assets, and is
calculated using the liabilities and owners equity section of the balance sheet. The debt
to equity ratio showed a considerable increase, which means that debt has become a
larger proportion of total financing. Times interest earned indicates the adequacy of
income from operations to cover required interest charges. It changed slightly from year
to year.

Capital Structure Analysis

Debt to Equity
Ratio
(TL/Equity)
Times Interest
Earned
(NIBIT/Interest
Expense)
Debt Service
Margin (Op. CF/
Current NP)

1999
8,718,900/
3,921,500=
2.22
2,302,300/
307,800=

2000
8,943,800/
4,061,500=
2.17
2,494,700/
348,200=

2001
9,883,400/
4061500=
2.43
2,723,000/
361,200=

2002
11,067,200/
3,052,300=
3.63
2,979,700/
368,700=

2003
11,977,800/
2,711,700=
4.42
3,199,300/
401,500=

7.48
2,135,800/
No CNP=
N/A

7.16
2,257,500/
No CNP=
N/A

7.54
2,360,600/
No CNP=
N/A

8.08
2,765,200/
No CNP=
N/A

7.97
2,970,900/
No CNP=
N/A

25

Other Ratios
Cash Ratio
(Cash+Mkt.
Sec/Current
Liab.)
Leverage
(Assets/Share
Holder
Equity)

1999
152,100/
1,951,000=
.08

2000
159,900/
1,675,700=
.10

2001
162,600/
1,736,500=
.1

2002
188,900/
1,787,700=
.11

2003
191,100/
1,857,200=
.1

12,640400/
(12,640,4008,718,900)=
3.22

13,072,700/
(13,072,7008,943,800)=
3.17

13,944,900/
(13,944,9009,883,400)=
4.63

14,119,500/
(14,119,50011,067,200)=
4.63

14,689,500/
(14,689,50011,977,800)=
5.42

Ratio Analysis
Liquidity, Profitability, Capital Structure
Liquidity
In the analysis of liquidity it was found that Anheuser-Busch may have some
trouble if it needed to immediately repay its short term liabilities. Overall, the liquidity
performance of Anheuser-Busch was good, but with a negative working capital the
company has a current ratio and quick ratio of less than one. When using AnheuserBuschs main competitor as a benchmark for liquidity, it was found that Coors was
almost twice as liquid on a short term basis, according to the current ratio. Because the
current ratio and quick ratio of Anheuser-Busch are both less than one, it is an indication
that they may not be able to repay their short term liabilities. A positive sign for
Anheuser-Busch is that the current ratio is increasing, and is nearing the industry norm of
around 1.0. Another sign of positive liquidity is the increase of accounts receivable
turnover accompanied by faster collection of accounts receivable over the five year
period. These steadily improving numbers are a good sign for creditors and are a good
sign of effective credit management. This also improved the liquidity of Anheuser-Busch
because the faster collection means a shorter period of time that the company must wait

26

to turn its receivables into cash. Yet another trend that has increased the liquidity of
Anheuser-Busch is the increase of inventory turnover. This increase means that
Anheuser-Busch has less cash and cash equivalents tied up in inventory. The
accompanying decrease in the days supply of inventory shows that sales and inventory
management are timely and efficient. Despite the fact that working capital was negative
over the last five years and that the current ratio was lower than par, the overall liquidity
of Anheuser-Busch is impressive relative to both the industry and to its main competitor.
The forecasts for Anheuser-Busch should reflect the efficiency of the management that
has been shown by the liquidity ratios.

Profitability
Assessing the profitability of Anheuser-Busch has given many indicators of future
profitability as well as signs of current performance. The most influential measure of
profitability performance was an evaluation of return on equity. While the total amount
of equity has decreased significantly since 1999, the returns on equity have increased
significantly, as shown in the calculation of equity efficiency. Anheuser-Busch has
shown significant growth in its return on equity, almost doubling its performance from
1999. This is a significant indicator that Anheuser-Busch has made significant attempts
at focusing on profit improvement, something that a prospective shareholder would be
looking for. This improvement in ROE is especially remarkable considering the returns
recorded by Anheuser-Buschs closest competitors. The percentage return on equity in
2003 for Coors Brewing Company was not even one-fifth of the percentage returns made
by Anheuser-Busch, illustrating that the managers of Anheuser-Busch are utilizing the
funds invested by shareholders in a manner above and beyond what is possible by its
competitors. Anheuser-Busch also beat the overall market average for return on equity
by the same amount (77%/14%). When comparing the return on equity to the cost of
equity capital, we found another positive indicator of future profitability. The returns
made on equity investments over the last five years far exceeded the cost of equity
capital, showing positive signs of long-run profitability for Anheuser-Busch. The
consistent ability to achieve returns greater than its competitors and returns in excess of

27

the cost of equity capital is an indicator that Anheuser-Busch has a superior competitive
advantage for its industry. Because market value to book value ratios are a key
determinant of return on equity, we also compared this ratio to that of Anheuser-Buschs
main competitor, Coors Brewing Company. When comparing the market value of equity
to book value for Anheuser-Busch against Coors, we found the difference to be another
indicator of Anheuser-Buschs superior performance.
Another factor in the analysis of profitability is the operating efficiency, which is
detailed in the common size income statement. Operating efficiency was measured
partially by looking at the gross profit margin over the last five years. Gross profit
margin has been consistent, increasing slightly over the last five years due to increases in
both gross profit and sales. The consistent increase indicates an ability to earn future
positive profits, something that will be taken into account when forecasting. Another
measure of operating efficiency was the operating expense ratio, which decreased slightly
over the examined period. The decrease was a positive sign of increasing profitability,
but at 67% it is still relatively high in comparison with Coors 21%. Net profit margin
was also examined in the analysis of operating efficiency as an indicator of future
profitability. The net profit margin increased slightly at a rate of 3% over the last five
years. At a total net profit margin of 13%, this shows that Anheuser-Busch is retaining
13 cents of every dollar of profit. The consistent increase is an indicator of future ability
to increase profit retention, and in addition to positive returns on assets and on equity
makes Anheuser-Busch very attractive in terms of profitability.
The other tools used to measure profitability for Anheuser-Busch were asset
productivity and return on assets.

The asset productivity was measured using the asset

turnover rate, which remained virtually unchanged over the five year period. This rate
remained slightly over 1.0, which tells us that each dollar of assets produced only about
one dollar of sales. Anheuser-Buschs competitor Coors has a higher asset turnover, but
also has a trend of decreasing asset turnover. This will be useful for forecasting because
it shows that Anheuser-Busch has the ability to increase its operating efficiency when its
competitors cannot. The return on assets for Anheuser-Busch were also positive, which
is impressive considering how much additional assets were acquired with the lingering
acquisition of Chinas largest brewer. This shows that Anheuser-Busch is able to make

28

wise investments in its assets, a measure of profitability that is necessary for any industry.
This also tells us that the managers are using their assets efficiently, something that is
important for forecasting future profitability.

Capital Structure
After evaluating the financial statements of Anheuser-Busch, we have determined
that they have a strong capital structure. The increasing amount of debt financing with a
decrease in the amount of equity financing has caused a relatively sharp increase in the
debt to equity ratio. This affects the sustainable growth rate by increasing return on
equity and decreasing the dividend payout ratio. The final result is an increased
sustainable growth rate. With over four times more debt than equity, the ability to cover
interest expense becomes a concern. The comparably high D/E ratio appears to be a
credit risk. However, these concern are overruled when we examine the times interest
earned calculation. With almost eight times as much income before interest and taxes as
interest expense, Anheuser-Busch can comfortably cover its interest expense. The
reasons for a large amount of debt financing cannot be found in this quantitative analysis
of the financial statements, but it is most likely due to a corporate tax shield that is
available for debt financing. Another benefit of the high amount of leverage is that it
focuses the management on creating value to the stockholders. The final measure of
Anheuser-Buschs capital structure was the debt service margin, which was zero over the
last five years. This number is zero because there are no payments on the principal of
debt required within the next year. This shows that Anheuser-Busch has no need to use
its operating cash income to pay off its debt. This also may be a positive sign of credit
risk because it shows that the creditors have faith in Anheuser-Busch to repay its
liabilities. Overall, Anheuser-Busch has little credit risk, and shows the ability to cover
all of its interest expenses. The sustainable growth rate is another promising factor that
shows that Anheuser has the ability to grow over 50% in one year. This allows
Anheuser-Busch to invest and take growth opportunities almost without limitation. This
is a factor that has a prominent impact on the managements capital structure decisions,
as well as their profitability strategy.

29

Summary
After reviewing the past five years of financials for Anheuser-Busch, the financial
ratios have determined that they have efficient and effective management, as well as a
sound strategy and capital structure. The return on equity shows enormous opportunity
for future profitability, and the liquidity and capital structure prove that Anheuser-Busch
has the ability to meet all of its short term and long term obligations. The results of
analyzing these ratios should lead to positive forecasts for a promising future for
Anheuser-Busch.

Method of Comparables
We did an industry average with all firms, and then did an average excluding the
outliers. We found that when excluding the outliers, the calculated price did not come
closer than then actual price. We interpret this to mean that the companies used in the
average are not good representatives of our industry. Anheuser Busch is in a unique
industry because we have diverse holdings and a diverse asset base.

30

Method of Comparables Valuation

P/E
Coors
Red Hook
Pyramid
Diageo
Kirin
Industry Average

P/B
14.54
n/a
n/a
16.29
28.81
19.88

P/S

1.74
0.42
0.86
6.15
1.2
2.074

D/P
0.0118
n/a
0.0406
0.0452
0.0215
0.029775

P/S

1.74
0.42
0.86
6.15
1.2
1.055

D/P
0.0118
n/a
0.0406
0.0452
0.0215
0.029775

0.62
0.71
0.48
2.55
0.6
0.992

*highlighted section denotes outlier

Without Outliers
P/E
Coors
Red Hook
Pyramid
Diageo
Kirin
Industry Average

P/B
14.54
n/a
n/a
16.29
28.81
15.415

0.62
0.71
0.48
2.55
0.6
0.6025

Anheuser Busch
EPS
Book Value
Dividend
Sales

2.707
3.499
0.98
18.58

Method With Outliers

A-B Price

Method Without
Outliers
A-B Price
Actual Price 11/4/04

P/E
53.81516

P/B
7.256926

D/P
32.91352

P/S
18.43136

P/E
41.728405

P/B
3.691445

D/P
32.91352

P/S
11.19445

50.7

The price to earnings ratio with the outlier came closest to the actual price of
50.70. This does not go along with theory that taking out outliers from the industry
average will bring the calculation closer to the actual price. When taking out the outlier,
the price was ever further from the actual.
The price to book calculation was the worst method used. It was the same result
as the P/E ratio in that the calculation without the outlier was further from the actual price
than the calculation with the outlier.
The Dividends to Price method was the next closest to the actual price, yet was
still a poor method. The Price to Sales method also does a bad job of calculating the
actual price.

31

Overall the Method of Comparables is not a good method to use for our valuation
analysis. This is primarily due to the fact that our industry is unique, and it is difficult to
find many firms in our industry that have similar attributes.

Cross Sectional Analysis

Current Ratio
2
1.8
1.6
1.4
A-B

Ratio

1.2

Coors

R-H

0.8

Industry

0.6
0.4
0.2
0
1999

2000

2001

2002

2003

Years

Anheuser Buschs Current Ratio is lower than that of the industry and its
competitors. This ratio shows that Anheuser Busch has a lower short term liquidity than
its competitors and the industry average. With a current ratio below one, Anheuser
Busch can not efficiently cover its current liabilities from the cash gained from its current
assets. The current assets may not be liquid making it more difficult to pay off its current
liabilities.

32

Quick Asset Ratio

1.4
1.2
1

Ratio

A-B
0.8

Coors
R-H

0.6

Industry
0.4
0.2
0
1999

2000

2001

2002

2003

Year

Since Anheuser Busch collects its accounts receivables in a shorter period of time
their quick asset ratio is below the industry average. This ratio shows that Anheuser
Busch is able to cover its liabilities in case of an emergency; however, since the quick
asset ratio is based on the assumption that the firms accounts receivables are liquid the
current ratio is a better indicator of the firms ability to pay off its current liabilities.
Gross Profit Margin
60%
50%

Percent

40%

A-B
Coors

30%

R-H
Industry

20%
10%
0%
1999

2000

2001

2002

2003

Year

33

Anheuser Buschs gross profit margin is above the industry average at about 48%.
This means that the company is turning 48% of its sales into gross profit. Anheuser
Busch is performing well compared to the industry and most competitors, and showing a
steady increase over the past five years.
Return on Asset Ratio
16%
14%
12%

Percent

10%
A-B

8%

Coors

6%

R-H

4%

Industry

2%
0%
-2%

1999

2000

2001

2002

2003

-4%
Year

Anheuser Busch is able to generate a higher percent of profit for each dollar
invested in assets compared to its main competitor as well as the industry average. The
company uses its diversified assets more efficiently than its competitors.
Return on Equity
90%
80%
70%
60%
A-B

50%

Coors

40%

R-H

30%

Industry

20%
10%
0%
-10%

1999

2000

2001

2002

2003

Anheuser Buschs investors are receiving a higher percentage return on their

investment in the company, compared to its competitors. This large increase in ROE
34

over the past few years leads us to believe that the company has become more profitable.
This may also attract potential investors allowing Anheuser Busch to expand its assets
and become even more profitable.
Debt to Equity Ratio
5
4.5
4

Ratio

3.5

A-B

Coors

2.5

R-H

Industry

1.5
1
0.5
0
1999

2000

2001

2002

2003

Year

The debt to equity ratio says that Anheuser Busch has a high credit risk to which
it is exposed. For every dollar of owners equity Anheuser Busch has been increasing its
liabilities beginning around 2001. This may be due to the economy, since around 2001
the economy has been decreasing.

Financial Statement Forecasting Methodology

When looking at Anheuser Buschs previous 4th quarters we realized they have
been somewhat lower than other quarters. It was 11% lower than last years quarter. We
took this and used it when forecasting for our fourth quarter. Using this information we
took the average of the first three quarters and multiplied it by one minus 11% to
subsidize for the usual drop in the fourth quarter.
When looking at Anheuser Buschs trends and benchmarks, there are many
interesting facts that we took into consideration when forecasting. When forecasting
Anheuser Buschs sales growth we recognized that over the past two years their growth
has increased substantially. Taking this into account we used a weighted average when
forecasting the sales growth. When forecasting for NOPAT margin we took the moving
average of the past five years. We did this because although their sales have increased

35

their NOPAT has not increased as drastically. We thought taking a weighted average
may not be the best solution since NOPAT has not had any drastic increases or decreases.
While forecasting for after tax net interest rate we simply used an average. We did this
because when looking at our companys debt to capitol ratios. They have been very
similar for the 5 previous years leading us to believe that they will be relatively the same
for the forecasted years. We used a simple average when calculating the Beginning net
working capitol to sales ratio, since the ratio hasnt deviated a substantial amount. Also,
our working capitol to sales has been relatively the same except for one small change.
The next assumption we made was for the beginning net long term assets to sales ratio.
We used a simple average, because Anheuser Bush has a great record of asset utilization
skills. With all their different ventures we believe that this is the best way to forecast.
For our final assumption we used a simple average when forecasting for the beginning
net debt to capital ratio. We did this since our debt to capital ratio has been relatively the
same for the past five years. Since the capital structure policy has been constant over the
past five years we assume that it will do the same for the next ten.

Most of the items in the income statement were forecasted using a five year
moving average. The growth in things such as cost of products wasnt very constant, so
it seemed more reasonable to use an average to forecast rather than a growth rate. This is
true for several of the items in the balance sheet such as accounts receivables, inventory,
and intangibles. However, some items did show a growth trend. We forecasted these
items to grow at a certain percentage for fives years, and then level off for the next five
years. Cash and equivalents is forecasted to grow by 2.5%, along with accounts payable.
Long term debt is estimated to increase by 10% each year, and other long term liabilities
will increase by 5% each year. With the cash flow statement, capital expenditures and
purchase of businesses is forecasted using a five year moving average. Net issuance of
stock uses a two year moving average. Debt and amortization, net issuance of debt, and
dividends is estimated to grow by 2.5% and level off.

Limitations, Strengths, and Weakness of Forecast

36

One limitation of our forecasts is the fact that Anheuser Busch has been growing
very rapidly. We had to forecast that eventually the growth will level off, and doing this
is a difficult task. If we are wrong in our assumption, it could throw off many of our
numbers. However, this is a good problem to have. Since some of our subjects have
stayed relatively similar over time, it was easier to forecast using a variety of average
formulas. Given that it has remained similar from the beginning some of the numbers
may be off a little but over all they will be very close to the actual. Anheuser Busch
doesnt have many competitors and that it is a difficult industry to get into, its market
share will be relatively constant for many years. Because we had to assume about future
events some of our forecasts may be very accurate while some may be imprecise causing
some years to be very accurate while others may not. Also for many of our forecast
models we didnt have an exact number to go by so we had to infer a rate from years past.
This is the most accurate way of forecasting however it still leaves room for deviation.

The Valuation Process

The purpose of this section of the report is to convert our forecasts into an
estimate of value of Anheuser-Busch. Valuing the firm is important for many reasons,
and can be applied to various business strategies. Everything from the capital structure
decision to external security analysis is based on the valuation of the firm. Because so
many decisions rely on valuation of the forecasted data, it is critical to ensure that the
estimates are accurate and realistic. These decisions, which will be made by the firm and
by external entities, affect the business, accounting, and financial strategies of the
company.
To properly and accurately value Anheuser-Busch, our valuation models
considered forecasts over two different time horizons. We forecasted financial
information over a finite period of ten years. We then considered the terminal value by
making estimates of the firm to the end of time. Once these forecasts were made we
estimated the cost of capital to use as a discount rate for the forecasts. To arrive at a
more accurate picture of the value of the firm, many methods were used to calculate the
estimated value. Using several approaches to the valuation process allows us to consider

37

all of the factors that affect the forecasted data, and provides a solution to many of the
deficiencies within the models.
To implement the various models, we forecasted financial data based on abnormal
earnings and book value, as well as free cash flows. These forecasts were made for a
time period that spans the life of the firm. The valuation methods to be used are as the
method of comparables approach, the discounted dividends model, discounted free cash
flows, longterm residual income model, abnormal earnings model, and the discounted
residual income. All discounted models are discounted using the estimated weighted
average cost of capital. When the models are complete, a sensitivity analysis will be
performed to test any differences in our valuation versus the value given by the market.
If large differences arise in our valuation and the price given by the market, it will be
necessary to look into how the differences came about. The sensitivity analysis should
look into all of the assumptions made in our valuation and compare them to the
assumptions made by the market. We will then vary the growth rate and discount rate to
determine how changes in our estimates would affect the outcome of our valuation. If
our assumptions seem accurate and realistic based on the current business strategy of
Anheuser-Busch, than we will be able to determine if the market is overly optimistic or
pessimistic about the future of the company. This is a critical step for internal and
external analysts, as it will allow the entities to determine the real value of the company.
Once the valuation models are complete and the accuracy of the estimated value
has been assessed, the proper strategy decisions can more easily be made. An accurate
evaluation will give the firm, as well as potential investors a competitive advantage in the
decision making process. According to the theory of efficient markets, this competitive
advantage can provide opportunities to make large gains in the market, for both the firm
and individual investors. The competitive advantage will only come about if the analysts
can determine the basis for the difference in the market price and the estimated value.
Because each model incorporates different financial data, all of which is forecasted based
on different assumptions, the analyst must be careful in determining what a practical
valuation of the company is. Once again, these assumptions must be based on realistic
outcomes achievable by the company.

38

Sensitivity Analysis
When doing the sensitivity analysis for each of the valuation models, we found
that there are a few costs of capitals, WACCs, and growth rates that make the price an
accurate description of the firm. Our sensitivity analysis shows that Anheuser Busch is
undervalued.
When doing the sensitivity analysis for the residual income model, some of the
models were extremely off. The closest cost of equity and growth rate to the actual price
was 8% and 10% respectively. Some of the other numbers come close to the price, but
not an acceptable price range. This model is one of the better indicators of actual price
for Anheuser-Busch.

cost of equity

growth
rate

8%

10%
50.53

5%
3%
0%

$
$
$

27.21
22.75
19.40

9%
$ 104.32
$ 35.48
$ 27.82
$ 22.70

5%
NA

2.76%
NA

NA
$ 90.65
$ 45.83

NA
NA
$ 83.97

The free cash flow valuation method proves to be somewhat accurate using our
estimated values. Our estimated values show that Anheuser Busch may be undervalued.
When manipulating the numbers we are able to get close to the actual. This is one of the
better models for valuating Anheuser Busch.

WACC
10%
growth rate

8%
5%
3%
0%

$
$
$
$

43.14
15.71
10.50
6.58

9%
$
$
$
$

98.33
23.12
14.77
9.20

5%
NA
NA
$ 74.32
$ 30.33

2.93%
NA
NA
NA
$ 64.19

The dividend discount model is the worst representation of the actual price.
However, this is not surprising since this model is usually the worst estimate of actual
price. Using our estimated numbers, our price came out to be $18.87. This model can be

39

accurate if the numbers are changed drastically. In general this is not a very good
measure for actual price.

8%
5%
3%
0%

growth rate

$
$
$
$

10%
14.26
6.80
5.38
4.32

cost of
equity
9%
$ 28.61
$
8.61
$
6.38
$
4.90

5%
NA
NA
$ 20.63
$
9.74

2.76%
NA
NA
NA
$ 18.81

Long term residual income method is a somewhat accurate estimate of the actual
price. At our estimated cost of equity, Anheuser Busch may be overvalued. This method
has a wide range of prices. However, the most reasonable costs of equity and growth
rates show an accurate representation. Overall this method proves to be an accurate
representation of the actual price.

growth
rate

8%

10%
$ 91.86

cost of
equity
9%
$ 183.77

5%
3%
0%

$ 39.82
$ 29.90
$ 22.47

$ 49.77
$ 34.89
$ 24.97

5%
NA
NA
$ 104.67
$ 44.94

2.76%
NA
NA
NA
$ 81.41

The abnormal earnings model proves to be a decent representation of the actual

price. It also compares to the numbers we have estimated on the previous models. This
method shows a fairly good representation of Anheuser Busch's actual price.

growth
rate

8%

10%
$14.01

cost of
equity
9%
$131.91

5%
3%
0%

$12.84
$ 4.44
$ 0.93

$ 26.43
$ 9.36
$ 2.57

5%
NA
NA
$ 64.94
$ 27.43

2.76%
NA
NA
NA
$ 55.04

40

Discussion and Analysis of Overall Valuation Results

Beta and WACC

When estimating our beta, we calculated a -.1276, not close to the published beta.
Our R squared is essentially zero, meaning that our estimate is not very accurate. The
estimation of beta can be found in the appendix of the report. Our weighted average cost
of capital is 2.93%. Cost of equity is very low, due to the fact that our beta is negative.
Therefore, the WACC is low mostly due to our negative beta. This weighted average
cost of capital may not be very reasonable. The calculations for WACC can be found in
the appendix.

Performance of the Models

All of the models proved to be very useful in the valuation of Anheuser Busch.
We evaluated and analyzed the data from each model. The models can be found in the
appendix at the end of the report.
The first method that we used was the method of comparables. This method
proved to be very inaccurate. Some of the models such as the Price to Book, Price to
Sales, and the Dividends to price were very inaccurate. However, the Price to Earnings
came within two dollars of the actual price. When computing the price using the method
of comparables without the outliers. The price was further away from the actual, than it
was with the outliers. Overall if you are able to distinguish which ratio is the best
predictor of the price, the method of comparables would not be an invaluable tool when
valuing Anheuser-Busch.
The next valuation method we used was the Residual Income model. When
manipulating the growth rate and the cost of equity we were able to get our model to
within 50 cents of the actual price. This model proves to be very efficient when valuating
the price of Anheuser Busch. The cost of equity and growth rate that enabled us to get
the closest to the actual price was 10% and 8.25% respectively. These are very reasonable
numbers that can and are achieved by Anheuser Busch. However, when doing the
sensitivity analysis these numbers can be drastically changed. Overall this method of

41

valuation is very accurate if the right cost of equity and growth rate is used. If the best
choices arent used, the price will vary greatly.
After the residual income we used the Free Cash Flows model to value AnheuserBusch. This model came closer to the actual when using our estimated numbers for
WACC and cost of equity. This price was about five dollars away from the actual price.
This method is the closest one to the actual price. The free cash flow method also
indicates that the stock may be undervalued by about five dollars. This method can be
very accurate to the right price when changing some of the numbers around.
The next model was the Dividend Discount Model. This model proved to be
inaccurate of our actual price. However, this model is notorious for having inaccurate
estimated prices. When you change the cost of equity and growth rate it is possible to
come up with an accurate model. Yet, this is not very realistic of our estimates.
The Abnormal Earnings method proves to be a very accurate model. It shows that
the company is worth more that the actual price, but it is not outside of the 15 % limit.
When changing the cost of equity and the growth rate we were able to almost exactly
estimate the actual price. This method is one of the best methods we have used to
estimate the intrinsic value of our firm.
When using the residual income model, we find that for our forecasts are not as
accurate as other models. It shows that our firm is extremely undervalued, which
according to most of our models is incorrect. When using optimal levels of cost of equity
and growth we are able to accurately value our firm. However, the changed levels of cost
of equity and growth may be unreasonable.
According to our calculations Anheuser Busch may be slightly undervalued.
Most of our accurate models show that Anheuser Busch is undervalued by about three
dollars. This is evident in our method of comparables and our free cash flows model.
The other models do not seem to reflect the firm as well as the two that are already stated.
However, the three dollars does not cover the usual 15% to say that the firm is actually
undervalued. Therefore, the firm is very close to being valued correctly, but it is
somewhat undervalued.

42

When looking at the overall results of the valuation there are a few strengths, and
weaknesses. First Anheuser Busch has a negative beta which is good, but it makes for
difficult valuation. This makes for a low cost of equity, and with a low cost of equity
there is not a wide range to estimate a growth rate. Another limitation is that the
dividends discount model is consistently inaccurate therefore it is unrealistic to rely on
this method. One weakness of our method of comparables model is that when
eliminating the outliers the price became farther away that of the actual. Our free cash
flow model was very accurate however a limitation of this model is that if, our forecasts
are inaccurate so is the estimated price. One of the biggest strength of or models is that
most of our estimated models fall in the +/- 15% range, this means that our company is
pretty accurately valued. Also, when using these models you can change the cost of
equity, WACC, and the growth rate. This can help to give you a more accurate
estimation of the value of the firm. Overall our models present an accurate estimation of
our firms actual price.
We would have liked to have a few other bits of information to make our
valuations more accurate. First, an exact cost of equity and beta would have proven to be
of great value to us when estimating our firms price. This could have allowed us to
estimate a much more accurate price of Anheuser Busch. Also, the most accurate
forecasts possible would have been a great asset to us. If our forecasts were more
accurate our models may have been too. However, forecasting is a difficult process, and
can vary greatly. More readily available information by the company would have been
an asset to our valuation. In addition, if the firm had provided better financial
information, we would have fewer variations in our numbers. Finally, all of the
information that we had, made for a very accurate valuation, but if our information was
more accurate our models could be even more exact.

Results
When using the applicable models, Anheuser-Busch seems to be undervalued.
We have come to this conclusion by taking note that the justifiable models generally
produced a price per share higher than given by the market. The models that were
considered unjustifiable were so because they produced outrageous results that could not

43

be relied upon. When conducting the sensitivity analysis it is clear that the acceptable
models produced values for Anheuser-Busch that are consistently higher than the market
value. The combination of solid financial data and positive business strategies that focus
on growth and expansion, along with evidence from the valuation models, make it clear
that Anheuser-Busch is undervalued.

44

Appendix
All of the evaluations for the different models are recorded in the appendix. The layouts
of the individual models are as follows:

Forecasted Financial Statements

Estimating Beta

Computing WACC

Residual Income Valuation model

Free Cash Flows and Dividend Discount models

Long Term Residual Income

Abnormal Earnings Valuation Model

Altmans Z-score

45