Warren Buffett just bought a bunch of Budweiser, so I thought I’d write about how I look at it. So I’ll put BUD through the YUMMMMY hoop and see what we come up with.
Do we want to own it all? Legendary company and I drink Bud and Corona, which they own half of. So yes.
Do we understand the business? They sell beer. Yeah, I get it.
Does it have Moat? Huge brand and by far the largest brewer. Handles inflation and recession well. The numbers back up the Moat.
- ROIC 18% and rising (good)
- ROE 44% and rising (good)
- EPS growth 13% and rising (good) (and a quick glance at the annual report says they are already bigger in China and in the US. Cool.)
- Sales growth 4% and rising (good)
- Debt payoff time 4 years free cash flow (not great but live-able).
Margin of Safety: Some, maybe enough….
- Assume 13% historical growth continues
- EPS today of $2.75
- EPS in 2015 =FV(13%,10,,-2.75) = $9.34
- PE in 2015 (2 x eps growth rate) = 26
- Value in 2015 = PE x EPS = 26 * 9.34 = $243
- Sticker Price today = PV(15%, 10,, -243) = $60
- MOS price = $60 / 2 = $30
- Mr. Market Price today = $46
Management? Solid. August Busch, family, and Patrick Stokes know this business and run it for us -- the shareholders.
Mr. Market is somewhat in "sell BUD" mode. But our pardner is not pricing this like there is no tomorrow. In other words, I’d like a better MOS than just a 25% discount to sticker. But it isn’t a bad discount for a blue chip, either.
Yield: Current yield = EPS / Price = $2.75 / $46 = 6% Compares well to 4.5% T-bill. 20 yr yield = FV(13%, 20, -6) = 70%. Looks really good compared to 4.5% T-Bill!.
So here’s where I come out. I want to buy it because it’s a great brand that is #1 in its business and is already doing well world-wide and can slam through economic recession and inflation.
So BUD is looking really good for the next twenty years. If we own the whole thing our yield in 20 years is going to be an awesome 70% per year ROI. I think if we want to sell it in twenty, for every $1000 we put in we’ll get back $6000 or so. Gotta love that. This is a perfect investment for a kid’s college fund. Say you need $100,000 in 20 years. Put in $3,000 now and you probably will have the college money just fine when your kid needs it. If you need it in 10 years, put in $15,000 now.
Is there a catch? Yeah. It could go down before it goes up. Here’s how to handle that:
The more it goes down, the more you buy, dollar-cost averaging your investment downwards. That will increase your overall ROI by a bunch. Use the indicators I teach about on stage. Get out, get in, get out…. With the big guys. But do it in an IRA, please, so you don’t pay tax. This takes more attention but can nail the biggest ROI. And it protects us by keeping us in cash lots of the time. And then it's fun to watch the market tumble!
So. Did I buy it? Yup. I did. At $46. But I’m watching the arrows on this one.
I hope it goes down like a brick because I’d really love to buy it at $30! That would punch the annual ROI to 21%! So don’t you forget Rule #1. That’s the key, folks. Rule #1.