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Subject: This Buds not for me Date: 3/4/2004 10:45 PM
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Anheuser-Busch

Who doesn't know what Anheuser-Busch does? They make beer and they run Busch Gardens and they make and recycle cans. Its just amazing how well they do it all and keep doing it year after year. The year 2003 was a big one for them. The company achieved record domestic beer sales volumes, with domestic beer shipments to wholesalers up to an all-time high of 102.6 million barrels, a 0.8% uptick over the prior-year results. Anheuser-Busch likely finished off 2003 with roughly a 50% market share, the first such performance in the company's history.

Brand name products

So much beer and so little time:
Bud's principal product is beer, produced and distributed by its subsidiary, ABI, in a variety of containers primarily under the brand names Budweiser, Bud Light, Bud Dry, Bud Ice, Bud Ice Light, Michelob, Michelob Light, Michelob Golden Draft, Michelob Golden Draft Light, Michelob Black Tan Lager, Michelob Amber Bock, Michelob Honey Lager, Michelob Hefe-Weizen, Michelob Marzen, Busch, Busch Light, Busch Ice, Natural Light, Natural Ice, King Cobra,
ZiegenBock Amber, Hurricane Malt Liquor, Hurricane Ice, Pacific Ridge Ale,
"Doc's" Hard Lemon, and Tequiza. ABI"s products also include three non-alcohol
malt beverages, O'Doul's, Busch NA, and O'Doul's Amber. During 2002 ABI
introduced Bacardi Silver, Michelob ULTRA, and American Red and discontinued Red Wolf Lager, "Doc's" Hard Apple, Killarney's, and Red Label. The Company brews Kirin Light, Kirin Lager, and Kirin-Ichiban through a joint venture agreement with Kirin Brewing Company, Ltd. of Japan for sale in the United States. ABI owns a 29.5% equity interest in Seattle-based Redhook Ale Brewery, Inc.

A new lo-carb, Michelob Ultra has just been introduced in 2002--a good play on the Atkins diet. The success of low-carb Michelob Ultra was a key contributor to the company's 2003 performance, capturing 2.1% of supermarket beer sales after just 15 months on the market.

In 1995, Bud purchased an initial 80% equity interest in a joint venture, renamed the Budweiser Wuhan International Brewing Company, that owns and operates a brewery in Wuhan, the fifth-largest city in China. This ownership interest has subsequently increased to 97%. The Company currently owns
a 4.5% equity interest in Tsingtao Brewery, the largest brewer in China, and producer of the Tsingtao brand. International sales, while still less than 8% of Anheuser-Busch's total beer volume, saw volume growth of 5% in 2003, thanks to the burgeoning beer market in China. International sales of the company's own brands, as well as equity investments in foreign brewers such as Tsingtao, should be a significant source of growth.


Theme parks

Unknown to me, Bud is one of the largest theme park operators in the US. It counts as its major competitors only Disney and Six Flags. The theme park business is a substantial part of the company. Holdings include(through a wholly owned subsidiary), Busch Entertainment Corporation (BEC), which currently owns, directly and through subsidiaries, nine theme parks. BEC operates Busch Gardens theme parks in Tampa, Florida and Williamsburg, Virginia, and SeaWorld theme parks in Orlando, Florida, San Antonio, Texas, and San Diego,California. BEC operates water park attractions in Tampa, Florida(Adventure Island) and Williamsburg, Virginia (Water Country, U.S.A.), and Langhorne, Pennsylvania (Sesame Place), as well as Discovery Cove in Orlando, Florida, a reservations-only attraction offering interaction with marine animals. Due to the seasonality of the theme park business, BEC experiences higher revenues in the second and third quarters than in the first and fourth quarters.The company is the third largest theme park operator in the United States.

Cans
And last but not least, Anheuser-Busch is the second-largest U.S. manufacturer of aluminum beverage containers, and the world's largest recycler of aluminum beverage containers.

Income statement


(in millions except per share data)

2002 2001 2000
Barrels of Anheuser-Busch beer brands sold worldwide 109.8 107.2 105.6

Gross sales $15,686.8 $14,973.0 $14,534.2
Excise taxes (2,120.4) (2,061.5) (2,034.8)
Net sales 13,566.4 12,911.5 12,499.4
Cost of sales (8,131.3) (7,950.4) (7,829.9)

Gross profit 5,435.1 4,961.1 4,669.5

Marketing, distribution and administrative expenses (2,455.4) (2,255.9) (2,174.8)

Operating income 2,979.7 2,723.0 2,494.7
Interest expense (368.7) (361.2) (348.2)
Interest capitalized 17.7 26.9 33.3

Income before income taxes 2,623.6 2,377.6 2,179.9

Net income $ 1,933.8 $ 1,704.5 $ 1,551.6

Basic earnings per share:
Income from continuing operations $ 2.23 $ 1.91 $ 1.71
Diluted earnings per share:
Income from continuing operations $ 2.20 $ 1.89 $ 1.69

Cash dividends paid on common stock $ 649.5 $ 614.1 $ 571.0
Per share .75 .69 .63

Weighted average number of common shares:
Basic 866.0 890.1 906.1
Diluted 878.9 901.6 919.7

Ratios for the income statement

2002 2001 2000 1999 1998

Gross Profit 46% 45% 45% 45% 43%
Operating Margin 28% 27% 27% 26% 25%
Net Margin 14% 13% 13% 12% 11%
Growth in Revenue 5% 5% 5% 4% --
Growth in Net Income 13% 10% 11% 14% --
Growth in COGS 2% 5% 5% 1% --

**Good margins
**Consistent growth
**COGS under good control

**Anheuser-Busch achieved record gross sales of $15.7 billion and record net
sales of $13.6 billion in 2002, representing increases of 4.8%, or $714 million, and 5.1%, or $654 million, respectively, compared to 2001. The increases in gross and net sales were principally due to a $570 million, or 5.7% increase in domestic beer segment net sales resulting from higher domestic revenue per barrel and higher domestic beer sales volume. Revenue per barrel generated $354 million in net sales improvement, while higher beer volume contributed $216 million of the increase. International beer net sales increased $43 million, primarily due to volume growth in China.

**Domestic beer revenue per barrel grew 3.5% for 2002, reflecting the
continued favorable domestic pricing environment, and the introductions of
Michelob ULTRA and Bacardi Silver. Revenue per barrel has increased by 2% or
more for 17 consecutive quarters. Excluding favorable mix, domestic revenue per barrel increased 2.8% for the year. The increases in revenue per barrel have enhanced gross and operating profit margins, which improved 160 basis points and 80 basis points, respectively, in 2002 vs. the prior year.

**The company's domestic market share for 2002 (excluding exports) was 49.2%,
an increase of 0.5 percentage point compared to 2001 market share of 48.7%.

**The entertainment segment net sales increased $11 million due to higher ticket prices and higher in-park spending, partially offset by slightly lower attendance.

**Cost of sales was $8.13 billion in 2002, an increase of $192 million, or
2.4% vs. 2001. The increase in 2002 is due primarily to higher domestic beer
segment costs, driven by costs associated with higher beer volume of $105
million partially offset by lower brewing materials, aluminum and energy costs.

**Income before income taxes improved for all the company's major business
segments in 2002. Domestic beer pretax income for the year was up 9.3%, to $2.92 billion, reflecting higher revenue per barrel and increased beer volume.
International beer segment pretax income increased 37% for 2002, primarily due
to volume and profit growth in China.

**Packaging segment pretax profits were up 42%, primarily due to higher soft drink can prices and volume, along with a profit contribution from the company's bottle manufacturing operation in 2002 compared to a loss in the 2001 start-up year.

**Entertainment segment pretax profits for the year were up 8% compared to 2001, excluding the $17.8 million gain on the sale of the company's SeaWorld Cleveland theme park in 2001.

**Anyone who watches television knows Bud spends a lot on advertising. It is an important part of their strategy to keep Bud brands competitive and in the forefront of consumer consciousness. They appear to appropriately book the expenses associated with advertising and do not play accounting tricks like capitalizing them. Advertising production costs are accumulated and expensed the first time the advertisement is shown, while media and promotional costs are expensed as incurred. Both of these approaches are acceptable under GAAP and the company applies each consistently, based on the nature of the spending.

**Revenue recognition also appears to be appropriate and not aggressive or subject to early recognition. The company's revenue recognition practices comply with SEC "Revenue Recognition in Financial Statements." They recognize revenue only when legal title transfers or services have been rendered to unaffiliated customers. They do not engage in consignment sales. For malt beverages shipped to independent wholesalers, title transfers on
shipment of product from the company's breweries. For company-owned wholesalers, title transfers when products are delivered to retail customers. They do not recognize any revenue when independent wholesalers sell the products to retail customers.


Balance sheet in millions

2002 2001


Assets
Current Assets:
Cash $ 188.9 $ 162.6
Accounts receivable 630.4 620.9
Inventories:
Raw materials and supplies 294.1 352.4
Work in process 82.8 79.8
Finished goods 186.7 159.6
Total inventories 563.6 591.8

Total current assets 1,504.7 1,550.4

Plant and equipment, net 8,363.9 8,390.0

Total Assets $ 14,119.5 $13,944.9

Current Liabilities:

Accounts payable $ 986.6 $ 945.0

Total current liabilities 1,787.7 1,736.5

Postretirement benefits 474.2 482.9
Debt 6,603.2 5,983.9

Shareholders Equity:
Common stock authorized 1.6 billion shares 1,453.4 1,445.2
Capital in excess of par value 1,024.5 810.2
Retained earnings 12,544.0 11,258.2
Treasury stock, at cost (11,008.6) (8,981.6)

Total Shareholders Equity 3,052.3 4,061.5

Total Liabilities and Shareholders Equity $ 14,119.5 $13,944.9

Ratios for the balance sheet

2002 2001 2000 1999 1998

Current ratio 0.84 0.89 0.92 0.81 0.95
Quick Ratio 0.53 0.55 0.56 0.49 0.59

Accounts receivable growth 1.53% 3.41% -4.55% 3.10% --
DSO 16.96 17.55 17.87 19.62 19.80
Days Inventory on hand 28.24 30.36 32.71 35.15 35.42
ROA 13.70% 12.30% 11.86% 11.09% 9.88%
ROE 63.36% 41.97% 37.58% 35.76% 29.25%
Tax rate 39.00% 39.00% 38.00% 38.00% 38.00%
ROIC 18.82% 16.43% 16.28% 15.78% 4.32%
Fixed asset turnover 0.46 2.16 1.06 1.04 6.62
Debt to equity 216.34% 147.33% 130.17% 130.64% 111.92%
Debt to capitalization 68.39% 59.57% 56.55% 56.64% 52.81%
Book value 3.61 4.62 4.57 4.25 4.42
Cash per share 0.22 0.1 0.18 0.16 0.24
Working capital -283 -181.9 -127.8 -386.6 -89.9
Non Cash Working Capital -471.9 -344.5 -287.7 -296.4 -314.7

**High debt levels are increasing
**DSO and accounts receivable show the company is good at collecting its accounts
**ROE, ROA, and ROIC high, but as far as ROE goes, the equity is declining and the debt is increasing and its not as impressive as the number would indicate.
**They purposely operate with negative working capital. The cash flow in is good with well-managed AR. They also have increased cash with higher debt. The higher liability and lower assets keep WC negative. They are able to collect receivables and string out payables to accomplish this cash flow strategy.

**The company uses its share repurchase program to manage its leverage position and typically operates at a working capital deficit as it
manages its cash flows. The company had working capital deficits of $283.0
million, $186.1 million and $127.8 million at December 31, 2002, 2001 and 2000, respectively.

**Debt is high but they keep it purposely at levels that maintain a consistent credit rating but give them money to carry out acquisitions and share buybacks.They are intent at keeping debt at this level. They are treading a fine line between so much debt they lose their A- credit rating and too little cash on hand to buy back shares and run the company.

**The company's primary source of liquidity is cash provided from operations. Principal uses of cash are capital expenditures, share repurchases, dividends and business investments. The company uses debt financing to lower its overall cost of capital.

I include the statement (abbreviated) of share holder's equity because there is a decrease in 2002 and it is partially due to a charge for underfunded pension expense of $296 million(they paid $201 M in a onetime pension fund payment 4th quarter 2002). It is common for pension underfunding to show up as a charge against shareholder equity and it is not good for shareholders. You should be concerned about this becoming a yearly charge and slowly eating away at shareholder value.

Shareholders equity

2002 2001 2000


Common Stock, $1.00 Par Value
Balance, beginning of period $ 1,445.2 $ 1,441.5 $ 716.1
Shares issued under stock plans 8.2 3.7 6.4

Treasury Stock
Treasury stock acquired (2,027.0) (1,163.8) (986.5)
Minimum pension obligation (296.6) (131.6) --

Balance, end of period $ (870.7) $ (338.3) $ (212.3)

Total Shareholders Equity $ 3,052.3 $ 4,061.5 $ 4,128.9

Pension fund status
The company made $201 million in accelerated contributions to its pension
plans in the fourth quarter 2002. Due to recent stock market declines,
projections indicated Anheuser-Busch would have been required to contribute this amount between now and 2005, but chose instead to contribute the entire amount in 2002 in order to enhance the funded status of the plans immediately.

The following shows the state of Anheuser-Busch's pension fund. The figures to note are the projected benefit obligation at the end of 2002 and the fair market value of the plan at the end of the year. The obligation was approximately $2.3 billion(yes billion!) and the value was $1.7 billion. So, the shortfall is $600 million. The pension fund deficit gives the company a large future debt that is not shown as such(debt on the balance sheet). When looking at the future, you need to take this into account and decide if the company is capable of paying this down without taking money away from shareholders and investments that enable the company to grow. In short, the high off balance sheet debt may make the company less able to respond to opportunities in the form of acquisitions or increasing dividends etc because it has to pay off this large debt to pensioners. The 2003 results are not available, but one would hope to see that the better investment environment had eliminated some of the shortfall.

2002 2001


Projected benefit obligation, beginning of year $2,051.3 $1,880.0
Service cost 66.7 59.8
Interest cost 143.6 136.7
Plan amendments 6.7 (0.2)
Actuarial loss 210.1 101.1
Benefits paid (154.8) (126.1)
-------------------------
Projected benefit obligation, end of year $2,323.6 $2,051.3
=========================

2002 2001

Fair market value of plan assets,
beginning of year $1,834.4 $2,277.1
Actual return on plan assets (174.5) (339.9)
Employer contributions 226.6 23.3
Benefits paid (154.8) (126.1)
-------------------------
Fair market value of plan assets,
end of year $1,731.7 $1,834.4
=========================

The contributions for 2002 were over $200 million greater than 2001, reflecting the contribution required by 2005.


Cash flow statement in millions

2002 2001 2000

Net income $ 1,933.8 $ 1,704.5 $ 1,551.6
Depreciation and amortization 847.3 834.5 803.5
Other, net (12.0) 38.2 30.9

Operating cash flow 2,624.3 2,316.0 2,230.0
Decrease in working capital 140.9 44.6 27.5

Cash provided by
operating activities 2,765.2 2,360.6 2,257.5

Capital expenditures (834.7) (1,022.0) (1,074.5)
New business acquisitions (19.0) (370.4) (42.9)

Increase in debt 1,151.8 1,213.4 803.9
Decrease in debt (505.9) (572.8) (514.0)

Dividends paid to shareholders (649.5) (614.1) (571.0)
Acquisition of treasury stock (2,027.0) (1,163.8) (986.5)

Ratios for the cash flow statement


2002 2001 2000 1999 1998

Total shares 846.6 879.1 903.6 922.2 953.2
Growth in Capex -38.69% 24.61% 28.10% -36.97% --
Capex/operating cash flow 30.87% 58.99% 49.50% 41.85% 63.60%
Free cash flow 1911.5 968.2 1140.1 1212 271
Free cash flow per share 2.26 1.10 1.26 1.31 0.28
Operating cash/Revenue 1.43 1.38 1.45 1.49 1.76

Growth in Cash Flow 97.43% 15.08% 5.93% 347.23% --


**Interest capitalized was $17.7 million in 2002, $26.9 million in 2001 and
$33.3 million in 2000. The amount of interest capitalized fluctuates depending
on construction-in-progress balances, which are impacted by the amount and
timing of capital spending, the timing of project completion dates and by market interest rates.

**Capital spending declined in 2002 and interest rates have generally declined throughout 2002 and 2001.

**The company considers its ratio of cash flow to total debt to be a key
measure of ongoing liquidity, and targets a ratio toward the upper end of the
30% to 40% range in order to maintain its strong credit ratings of A1 and A+,
from Moody's and Standard Poor's, respectively. Based on its specific
financial position and risk tolerance, Anheuser-Busch believes a strong Single
A rating strikes the best balance between a low cost-of-capital and maintaining adequate financial flexibility.

**The company's ratio of cash flow to total debt was 39.7% in 2002, 38.8% in 2001 and 41.6% in 2000. They have rather high levels of debt, especially if you look at debt to equity and debt to capital. They seem to believe that cash flow is adequate to meet debt and have kept to the range they like. However, they are at the upper end of the range and I would prefer to see them start to reduce debt rather than buy shares.

**Free cash flow positive and increasing

**They manage cash well with a combination of debt and cash from operations which is their stated strategy. They are comfortable with the rather high levels of debt. I don't think there is much concern that they will be unable to meet the payment schedule. Low interest rates have made it possible to borrow with less consequence.Interest expense has only increased slightly in 2002.



Equity income from foreign investments

Anheuser-Busch owns equity in other breweries and is able to grow internationally by this method. This ownership pays income called equity income. From 1993 to 1998,they accumulated a 50.2% direct and indirect equity interest in Diblo, the operating subsidiary of Grupo Modelo, Mexico"s largest brewer and producer of the Corona brand. The total cost was $1.6 billion. Anheuser-Busch does not have voting or other effective control of either Diblo or Modelo and consequently accounts for its investments using the equity method.

Dividends received from Grupo Modelo in 2002 totaled $40.5 million,
compared to $13.5 million in 2001 and $23.9 million in 2000.

Other international equity investments include a 20% equity interest in CompaniaCervecerias Unidas, the largest brewer in Chile, for $321 million. The company received dividends of $6.2 million and $12.3 million from CCU in 2002 and 2001, respectively.

In October 2002, the company announced the formation of a strategic
alliance with Tsingtao Brewery Company, the largest brewer in China, and
producer of the Tsingtao brand. Anheuser-Busch currently owns a 4.5% equity
interest in Tsingtao and accounts for its investment on the cost basis. Under
the final agreement, which closed in the first half of 2003, the
company will invest $182 million in Tsingtao common stock and convertible bonds, and then convert the bonds into stock over the next seven years to ultimately increase its economic ownership interest to 27% of Tsingtao.

Effective January 2000, the company converted its joint venture operation
in Japan into an exclusive license agreement with Kirin Brewing Company, Ltd.
for the production and sale of Budweiser in Japan. The pretax cost of converting to the license agreement was $9 million.

Options

Using the Black-Scholes model options values are (in millions, except
per option):

2002 2001 2000

Fair value of each option granted $13.86 $12.76 $13.14
Total number of options granted 14.2 13.9 13.0

Total fair value of options granted $196.8 $177.4 $170.8

                     
Options Wtd. Avg. Options Wtd. Avg.
Outstanding Exercise Price Exercisable Exercise Price
Balance,
Dec. 31, 2001 68,899,033 $33.63 44,100,568 $27.71
Granted 14,181,841 49.93
Exercised (8,821,350) 20.15
Canceled (146,254) 43.61
----------------

Balance,
Dec. 31, 2002 74,113,270 $38.33 47,001,757 $33.09

================

A substantial number of options were exercised in 2002--8.8 million and only 146 K were canceled.

Total shares 846 million
Dilution with total outstanding options of 74.1 million = 8.8%
Total value of all outstanding options= $1.027 Billion
Per share value $1.21

Selected current financials

Trailing P/E (ttm): 21.51
Forward P/E (fye 31-Dec-04) 18.85
Price/Sales (ttm): 3.04
Price/Book (mrq): 16.38

Profit Margin (ttm): 12.18% good margins
Operating Margin (ttm): 22.51%

Return on Assets (ttm): 12.00% high returns
Return on Equity (ttm): 68.73% decreasing equity responsible for this ROE
Revenue Growth (lfy): 5.10% same as 2002

Earnings Growth (lfy): 13.50% not increased from 2002
Total Debt (mrq): 7.08B continued high debt
Total Debt/Equity (mrq): 2.713
Current Ratio (mrq): 0.853
Free Cashflow (ttm)©¯: 1.94B continued positive free cash flow

Shares Outstanding: 814.76M
Float: 809.90M
% Held by Insiders: 0.60%
% Held by Institutions: 63.12%

Annual Dividend: 0.88
Dividend Yield: 1.68%



Discussion

Growth in part will be due to price increases. Consistent with its practice of implementing annual price increases in two phases, the company completed the first stage of its pricing actions for 2003 by raising prices in October 2002 in markets representing almost 45% of the company's domestic volume. These actions have been very successful, as reflected in the company's strong fourth quarter revenue per barrel performance in 2002. As planned, Anheuser-Busch is implementing the second stage of 2003 pricing actions on approximately 20% of its domestic volume. This should help ensure 2003 earnings will be increased and if such a strategy continues to be accepted by the consumer, 2004 should see increased revenues.

A discounted cash flow with a 5 year 10% growth(currently around 13%) and a 3% stable growth gives a price of $52.02. It currently trades around $51. The dividend yield is only about 1.68% currently. The stock is close to its 52 week high. The yield is less than I would like to see. It is unlikely BUD is going to appreciate significantly in price and a higher yield would be necessary to make the investment worthwhile since I expect only a small increase in share price. You might expect BUD to preserve principal, however, even if it does not appreciate much in price. The 1.67% yield would necessitate an increase of at least 7-9% to equal the total return of 8-10% that the market is expected to yield over the next few years.

From Morningstar:
We're still big believers in Anheuser-Busch and find the shares trading at an extremely attractive price. We've bumped up our fair value estimate by a dollar to $62, now that cash flows from the fourth quarter have been realized.

I think BUD may eventually reach $62 barring a major market correction. Even at this slightly high intrinsic value, there is only a 15% margin of safety.

The brewer may have to bolster its international efforts to augment slower growth in the United States. Despite its domestic dominance, the firm has not established a strong presence in overseas markets, choosing to focus on equity stakes in the largest brewers in Mexico and China.

They have done well investing in foreign breweries in an effort to increase foreign sales. Should this continue to be part of the strategy, 10% growth may be conservative. China appears to be an especially large untapped market. They do face new competition in South America, as Interbrew and AmBev discuss a possible merger. This would displace BUD as the largest brewer by volume and threaten the South American market for them.

Domestic beer drinkers continue to move toward imports and high-end beers. Even though Anheuser-Busch successfully leveraged other growth trends in light beer and "malternatives," it hasn't launched a superpremium brand to compete with Corona and Heineken, leaving a gap in its stable of brands. We doubt any efforts to reposition Michelob as an alternative to superpremium imports will work.

Microbreweries and premium beers may continue to erode BUDs domestic market. They have no reputation as a premium or specialty beer brewer.

Bottom line is, the intrinsic value of $52 is more realistic than the Morningstar $62 and a discount to $52 would make the stock a lot more attractive at this point. It is close to the 52 week high and I feel growth from here will be slow--steady, but slow. If the yield was higher, BUD might be more attractive at the current price. At least a higher yield would provide some return while waiting for a price per share increase. I would be buying at a discount of 10% to the present price or around $47.
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