State of the Shelanman

Anheuser-Busch (symbol: BUD) makes beer. Coca-Cola (symbol: KO) makes soft drinks. Certainly they are in the same general industry, though beer and coke (the drinking kind) aren't directly competing.

The author of the Motley Fool article, Stephen Simpson, exclaims: "Frankly, I've never quite understood why so many value investors love Anheuser-Busch so much. I certainly can appreciate the virtues of the company's wide economic moat, but where's the growth?" He goes on to explain that Coca-Cola is growing at about twice the rate of Anheuser-Busch.

But Mr. Simpson, Growth investing is about finding the companies that are growing rapidly and paying whatever price necessary to buy them. Value investors like myself instead look at the companies prospects for earnings and earnings growth in comparison to the price of the stock.

Assuming that Yahoo Finance's estimated growth rates and the like are close (this isn't necessarily always a good assumption in my mind, but for now...), Coca-Cola is growing its earnings at a rate of about 11.5% per year, on revenue growth of about 4.5%. In order to buy this large stable company undergoing 11.5% earnings growth, you must fork over $21.10 for every $1 of earnings (in 2004 — given 11.5% growth in '05, that would mean a forward P/E of about 18.60)

Anheuser Busch, on the other hand, is expected (again by Yahoo! Finance) to grow its earnings about 7.9% this year, on a revenue growth of about 5.6%. Today, $1 of Anheuser-Busch earnings can be bought not for $21.10 looking backward or $18.60 looking forward, but instead only $16.60 looking backwards, and about $15.50 looking ahead. This means that while the company is growing much slower, it's earnings are "on sale" — $3.10 less than those from Coca-Cola.

Now, granted, Anheuser-Busch's prospects for growth don't look as good right now (this is primarily due to a decrease in the American appetite for beer (or perhaps just cheap crappy American beer)). So, let's compare these two companies:

What does this mean? Even if the growth rates for these two companies remain the same for 5 years, looking at buying 2009 earnings, it would still be cheaper to buy Anheuser-Busch!

That's why value investors prefer it to Coca-Cola. By buying BUD, you get future earnings of a large beverage maker on sale (at least relatively speaking... I think $11.15 for a potential $1 earnings 5-years-out is expensive).

Also, how long can we expect these growth rates to remain accurate. Companies regularly miss expectations of quarterly earnings — and that's when the estimates are made the day before earnings are released! Who can say that the next generation won't be the Bud-Lite generation (let us pray that this is not the case!) — All-in-all I think Anheuser-Busch is a decent, but still moderately expensive long-term investment.

(As always, if you want an opinion on it's quality as a short-term investment, find a chartist!)

— The Shelanman