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SIVY ON STOCKS from money.com
November 27, 2000

The king of beers

Investors searching for defensive stocks are rediscovering the appeal of a
good brew. Anheuser-Busch looks like the top pick in the group.

By Michael Sivy

When the stock market gets rocky, many investors turn to drink.
Historically, buying shares in brewers has been a good way to play defense
in uncertain times because beer consumption is hardly affected by
fluctuations in economic growth. That hasn't counted for much during the
1990s boom, however. And the brewers have had bigger problems, too --
specifically, growth has gone flat. But that's all changing. A rotation in
stock-market leadership (away from momentum and into value) and shifting
demographics could lead to better times for all the U.S. beer makers and
Anheuser-Busch [BUD], maker of Budweiser, in particular.

Because of their high fixed costs, beer-makers' profits are highly
sensitive to very small changes in volume. And for the past two decades,
sales growth by volume has been terrible. Per-capita consumption is down to
less than a beer a day, a drop of nearly 11 percent since 1980.

No one will be surprised to learn that young adults are the most
enthusiastic beer guzzlers. In fact, though 21-to-27-year-olds account for
only 14 percent of the population, they put away 27 percent of the beer
consumed in the U.S. During the 1990s, the number of Americans in that age
bracket declined from 41 million to 36 million. But over the next few
years, their ranks will rise to around 38 million.

That bodes well for all brewers, but Anheuser-Busch may be best positioned
to capture the growth. As in the movie business and the magazine business,
success in the beer game depends on control of distribution. And
Anheuser-Busch is not only the biggest brewer, it also has the tightest
grip on its wholesalers. Distributors in more than 75 percent of
Anheuser-Busch's markets handle no other domestic beer (in 65 percent they
don't even handle foreign imports), while wholesalers in less than 30
percent in Miller's and Coor's markets are similarly exclusive.

Anheuser-Busch has steadily been improving its profit margins, but the key
to double-digit earnings gains will be the expected upturn in volume
growth. Per-share earnings growth is projected to average 12 percent
annually over the next five years. Combined with a 1.3 percent dividend
yield, the stock should offer a potential return to shareholders of at
least 13 percent. Since March, Anheuser-Busch has nearly doubled to $48 a
share, or 25 times next year's expected earnings. With a P/E almost double
its projected return, Anheuser-Busch isn't cheap, but it's a solid buy for
an investor looking for a top-quality defensive stock. And on any selloff
down to the low $40s, the stock would be a screaming buy.


###

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