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.

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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
China’s 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-Busch’s 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 Busch’s 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

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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 Busch’s 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-Busch’s 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 China’s 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.

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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 AnheuserBusch’s 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.

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09 0.38 Carlsberg Breweries A/S Private .33 COMP DE BEBIDAS ABV 21.90 -1.65B 24.89B 17. more specifically the beer industry. there are only two or three major competitors to Anheuser Busch. GLOBAL BREWERS RANKED BY VOLUME Company Symbol ANHEUSER BUSCH BUD Price Change Market Cap P/E 51.22 SABMILLER PLC S/ SBMRY.67% 40. it maintains heavy advertising and competitive pricing to retain market share.View Profile 5 .03 -0. Concentration and Balance of Competitors: While many breweries exist in the industry.PK 12. In order to obtain market share from rival companies Anheuser Busch is constantly using marketing techniques and product differentiation. Despite the fact that Anheuser Busch is a dominant market leader in the industry (see chart).Anheuser-Busch Five Forces Analysis Competitive Forces Rivalry Among Existing Firms: Industry Growth: In the market for alcoholic beverages. the market is consistently and constantly growing.PK 29.55 -3.33% 7.97% 14.46% N/A N/A HEINEKEN N V A D HINKY.92B 19. This allows Anheuser Busch to market to different sectors of the population and grow on a consistent basis.

Due to the low degree of specialization.01% 2. Excess Capacity and Exit Barriers: Excess capacity is not a major factor in this industry. and various philanthropic works.07 *www. exit barriers are relatively low. to many low cost variations. 6 . Newcastle plc Private .View Profile Grupo Modelo.View Profile ADOLPH COORS RKY 68.A. the size of the company is crucial in obtaining and securing market share. from a premium quality product.yahoo. the industry is able to reduce output and unload excess inventory. If demand does drop.Companhia de Bebidas das Américas Private . such as Sea World. 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.56B 14.79% 8.56 KIRIN BREWERY KNBWY 8. de C.View Profile Scottish &amp.37 -0. Companies in this industry compete aggressively for market share. By creating close relationships with suppliers. First Mover Advantage: Anheuser Busch set industry standards by being one of the first movers to establish brand name recognition. this allowed them to keep costs at a reasonable level.com Degree of differentiation: Anheuser Busch differentiates its product by offering more of a variety of beer than its competitors. Learning Economies: Because of a steep learning curve in the industry for beer.78 -0. New entrants must be able to invest in large capacity or enter into the market with less than optimal resources. Anheuser Busch extends its market exposure by acquiring other venues to promote its products. Private .48B 29.V.finance. S. as there is always a high demand for beer. Busch Gardens.

spirits. In the alcoholic sector.prism.findarticles.Relationships and Distribution Channels: Anheuser Busch is able to maintain existing relationships with their distributors because they are a reputable company in the industry.edu 7 . 2 • Wine • Spirits • Malt Beverages • Soft Drinks • Water 1 2 www. AnheuserBusch still controls almost half of the market limiting the threat of substitutes to a minimum.gatech. state. both the beer and wine and brandy sales have increased. and malt beverages are the leading competition in alcohol sales. New entrants will have difficulty obtaining the same kind of relationships because their brand is not as marketable. 1 After all of this information is taken into account. 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. while bottled water and soft drinks lead in the non-alcoholic sales.com www. there are many substitutes available to consumers. Threat of Substitute Products Although beer is the most common choice in the alcoholic beverage industry. Legal Barriers: There are many federal. Wine. and local environmental regulations that must be met before building a brewery. but beer sales have raised by a higher percent each year.

availability of product. 4 Bargaining Power of Suppliers 3 4 www. However. most consumers would switch brands if the price is right. Knowing this fact forces the different beer distributors to maintain a competitive price. The fact that they can switch between all of the different brands easily leads to competitive pricing. which gives the power of consumers a boost. The variety of what they offer helps prevent customers form purchasing another product.prism. most regular beer drinkers have a brand that they remain loyal to. and general intentions based on emotional state. 3 Relative Bargaining Power: A majority of consumers agree that all domestic beers are similar in taste. when price is factored in. Anheuser Busch’s extensive amount of products meets every customer demand. or image.edu www.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. Bargaining Power in Input and Output Markets Bargaining Power of Buyers: Price Sensitivity: As discussed above.prism. If the customer is looking for the best taste. 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.gatech. Buyers’ willingness to switch depends on personal preference.gatech. lower price.edu 8 .

has deterred many vendors from trying to contend. the power of suppliers is low.gatech. diversified market with several companies competing for their share of the market.edu 9 . Further explanation as to how the industry is differentiated is discussed in the accounting analysis. 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. Anheuser Busch has limited substitute beverages by diversifying its product line while keeping a strict focus on developing brand loyalty.Bargaining Power: Since there are so many different suppliers as well as substitute products. Also since there are few substitutes and vendors they can exemplify a large amount of bargaining power over the suppliers. and creating lasting relationships with distributors. Anheuser Busch has obtained a major segment by utilizing first mover’s advantage. It is a large. 5 www. Anheuser Busch has kept prices low by regulating their bargaining power over buyers like the aluminum and agricultural markets. applying economies of scale.prism. 5 Summary of Competitive Forces The alcohol beverage industry in is mainly differentiated but competition is still a factor. Exercising these resources. while being part of a saturated market.

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 .

and Bud Light finishes second. They have been a leader in the industry for 150 and have the two top selling brands. Anheuser Busch has almost thirty different drinks. While their product is similar to its competitors’ product. Through their marketing team the Busch Media Group. While other competitors only have a few different brands of beer. Anheuser Busch strives to deliver its product shortly after it is produced. and recognizable symbols and slogans. While being seen as a leader in the American industry. These tactics include concentration on product quality and product variety. AnheuserBusch has also invested in international breweries in Latin America.” symbols like the Clydesdale horses and phrases like “The King of Beers” Anheuser Busch has targeted markets from young to 11 . sex appeal. Anheuser Busch uses other tactics to differentiate its product. Another way of differentiating its product is through delivery of product and customer service. Anheuser Busch has also increased customer recognition and name association of its product by providing additional venues to distribute their product. By consistently providing timely delivery of a fresh product. and has even introduced an energy enhancing beverage.Competitive Advantages Key Success Factors: Anheuser-Busch’s core competencies focus on both bottling and their entertainment operations. By using “Real Men of Genius. They have created an empire of amusement parks and sporting venues that generate more opportunities to market and distribute their product. 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. varying from beer to malt beverages. Anheuser-Busch owns and operates many packaging facilities throughout the nation. Competitors have tried to imitate this strategy. Anheuser Busch has added value to its product without even altering the way it is made. Another way that Anheuser Busch maintains competitive advantage is through product differentiation. but have not been able to compete on the same scale as Anheuser Busch. Budweiser is number one. In addition to being one of the largest breweries in the world. while other competitors store their product for periods of time after it is produced. These acquisitions helped to strengthen their international brand strength world-wide. Anheuser-Busch has become a name synonymous with quality beer at a competitive price.

which started a new trend amongst beer drinkers. accounts receivable. Anheuser Bush has created a few different types of alcoholic beverages that conform to today’s health conscious way of life. and to stay current with customers wants and needs. and inventory. day fresh beer. Anheuser Busch seeks to sustain and continuously build upon their competitive advantages. an innovative approach. are other tactics that Anheuser Busch has employed to achieve a competitive advantage. and diversifying all of their relationships. It was one of the first to develop a low carb beer. 12 . The sales manipulation diagnostics shows the behavior of sales relative to cash from sales. This has caused customers to associate freshness with great taste. Born on dating. The integrity and success of Anheuser Busch relies on unsurpassed quality. Anheuser Busch realizes that they offer high quality products therefore relying on new marketing schemes to achieve customer loyalty and brand recognition. The core expense manipulation diagnostics shows earnings relative to expenses. Michelob Ultra. These tactics of differentiating their product have provided a valuable competitive advantage for Anheuser Busch. and their newest innovation. Anheuser Busch has a unique way of connecting to its customers by following changes in trends. quantitative measures and indicators must be examined. Accounting Analysis Quantitative Measures and Indicators To effectively analyze the past performance of Anheuser Busch.old while increasing brand name recognition.

which means sales increased more than accounts receivables.06 1.16 21.79 21.42 20.93 . Net sales to accounts receivables increased steadily.1 24.52 21.20 .93 CFFO/ NOA .05 18.91 20.05 1. Core Expense Manipulation Diagnostics: 1999 2000 2001 2002 2003 Sales/ Assets .93 .05 1.1 20.82 24.96 CFFO/ OI .88 . which indicates the company holding fewer inventories.08 These ratios show that net sales to cash from sales remained steady.18 .21 13 .94 . The net sales to inventory also increased.13 19.87 . These are both favorable results.91 .18 .05 1.9 .18 .Sales Manipulation Diagnostics: Net Sales/ Cash from Sales Net Sales/ Net Accounts Receivable Net Sales/ Inventory 1999 2000 2001 2002 2003 1.96 .

68% 3. Cash flows from operations to operating income went down for two years.08% Sales/ Assets -6.81% 3.45% -.23% No change CFFO/OI -1. but ended in an increase. and then increased significantly in 2002.Sales to assets varied slightly.81% 5. This could reflect the increase in sales relative to assets.38% 5.35% -1. % Changes in Measures: 2000 2001 2002 2003 Net Sales/ Cash from Sales Net Sales/Net Accounts Receivable Net Sales/ Inventory -.11% 5% CFFO/ NOA 14 .1% -3. This reflects the large increase in cash flows from operations.9% No change No change No change 11.23% 10.94% No change No change No change 7.55% 8.3% 6. The final ratio showed little or no change until the last two years.99% 1.

By concentrating on these key success factors. Anheuser-Busch has identified and set guidelines on all of its major accounting policies.*www. This method is based on the accrual accounting method.com Structure of the Formal Accounting Analysis Qualitative Measures Step One: Identify Key Accounting Policies Anheuser Busch’s competitive strategies of differentiation and cost leadership determine its key success factors. and the cost method is used for all other investments. 101. The equity method of accounting is applied for investments in which majority control can be exercised. • Principle of Consolidation: Consolidated financial statements include the company and all subsidiaries.anheuser-busch. Revenue is recognized when legal title transfers or services have been rendered. 15 . The managers’ decisions on these key accounting policies are as follows: • Revenue Recognition: Revenue recognition policies comply with SEC Bulletin No.

• Research and Development: Expensed as incurred. interest rates.• Cash: Cash is classified as demand deposits. • Derivatives: Accounting for derivatives follows FAS No. Accelerated ability to exercise options is applicable if change in control. If assets meet criteria for distinct asset classification than they are either Goodwill or intangible assets. Depreciation is calculated using the straight-line method based on varying weighted averages of useful life. 133. • Advertising and Promotional Costs: Production costs expensed after first time ad is shown. 109. sale of majority of assets. Inventories are valued using the LIFO method for the majority of inventories and the average cost method for the remainder. Costs of maintenance and repairs are expensed as incurred. • Intangible assets and Goodwill: Accounting for goodwill follows the adoption of FAS 142. Advertising media costs are expensed as occur. Intangibles can be added or removed from Goodwill. • Fixed Assets and Depreciation: Fixed assets are valued at original cost minus accumulated depreciation. Goodwill and other intangible assets amount to about $1. Accounting for deferred taxes follows FAS No. merger. and foreign exchange rates. The company makes required minimum 16 . or complete liquidation shall occur. This rule was adopted on January 1.3 Billion. state and foreign income tax laws to reduce current taxes payable. • Stock Option Plans: Options generally have a vesting period of 3 years with a maximum term of ten years. and cash in banks. • Income Taxes: Anheuser-Busch uses federal. 2002. not reported as material for any period. The company uses derivatives to reduce the vulnerability to the volatility in commodity prices. • Inventories: Valued at the lower of cost or market. investments in short term marketable securities with maturities of 90 days or less. • Pension Plans: The company has pension plans covering mostly all of it’s regularly employees.

Anheuser Busch’s key accounting policies are not all equally important. Additional contributions can be made to enhance the funds performance. the value of total inventories would have been $110. AnheuserBusch adopted FAS 142 and reclassified certain intangible assets into goodwill because they did not meet the 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-Busch’s financial statements. Anheuser-Busch is able to manage its reported numbers by changing methods of valuing inventory. • Special Purpose Entities: We were unable to find any related parties or special purpose entities. Anheuser-Busch has accounting flexibility to the extent of the options provided under SEC regulation. Revenue recognition and intangible assets are probably the most important. If the average cost method was used for Anheuser-Busch’s entire inventory. Inventory is accounted for using the LIFO and average cost methods for all of Anheuser-Busch’s business segments. and its goodwill and intangible assets are a vital part of its products. They also reclassified out of goodwill certain beer distribution rights that met criteria for separate asset classification. for its defined benefit pension plan. Step Two: Assessment of Degree of Potential Accounting Flexibility Anheuser-Busch has a significant amount of flexibility in choosing their key accounting policies.0 million higher than the current method values. This is due to the fact that Anheuser Busch has a substantial amount of revenue. but this flexibility does not permit managers 17 . One of the key accounting policies that is necessary to AnheuserBusch is in regards to their valuation of inventory. Another form of accounting flexibility is in the classification of goodwill. Advertising is also an important policy since Anheuser Busch spends a great amount of money on this.contribution of $71 million. but all changes in accounting policy are legal.

They make choices on their policies of amortization of goodwill. Published by the Securities and Exchange Commission 18 . causing them to have comparable accounting practices. indicating that they are not trying to hide anything. According to GAAP. inventory valuation. rather than using their flexibility to hide accounting distortions. All three companies use defined benefit pension plans. similar to that of Anheuser Busch. They are all similar in handling derivatives. while Coors seems to offer easier access to accounting and financial documents. Industry Norms: This industry is very developed and only has a few true competitors.to manipulate financial data outside of the letter of the law. generally accepted accounting principles. media costs are expensed when they occur. 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. Coors and Anheuser Busch both must conform to FAS 142. All three firms are very similar about their advertising and promotional costs. and many other accounting policies.S. They all use the accrual accounting method. they all must conform to the FAS 133 “Accounting for Derivatives and Related Hedging Activity” 6 . 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. making their 6 Anheuser-Busch Companies. revenue recognition. By choosing a different alternative it will undoubtedly produce differed results. Inc.. Coors has a more conservative accounting policy. We find that overall Anheuser Busch is more conservative with its accounting strategy. Miller’s goodwill is amortized unless it has an infinite useful life. 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. We found no special purpose entities. Anheuser Busch and Miller do a mediocre job in disclosing accounting and financial information. but their flexibility does not extend past the boundaries set by the SEC.

this is perhaps due to the fact that they are all related companies.. Advertising and Promotional Costs: Advertising being a large part if Anheuser Busch’s operations are expensed the first time the ad is shown. These investments must be accounted for on an individual basis. Inc. because there is a high degree of variance and no definite return from these beneficiaries. this is the only agreeable accounting method. Inc.. Advertising and media costs are all expensed when they occur. 9 The only other way of recording this would introduce unwanted instability to Anheuser Busch’s reported earnings.” 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. “Accounting for Derivatives and Related Hedging Activity” for their hedging and derivative activities. Published by the Securities and Exchange Commission 8 19 . This method is the industry norm. 7 Anheuser-Busch Companies. Therefore. 8 Accrual accounting is used since cash is only recognized when the investee company redistributes it. Published by the Securities and Exchange Commission Anheuser-Busch Companies. Derivatives: Anheuser Busch must conform to the FAS 133. Inc. They are all alike in their accounting practices. Published by the Securities and Exchange Commission 9 Anheuser-Busch Companies. this method is required by GAAP.. since there are no other alternative ways to record revenues under GAAP. 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. 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. While.accounting practices very similar. promotion costs are a reduction of net sales when they happen.

Anheuser-Busch has intangible assets in both foreign and domestic beer distributors. “Accounting for Stock Issued to Employees. Published by the Securities and Exchange Commission Anheuser-Busch Companies. Published by the Securities and Exchange Commission 11 20 . Anheuser-Busch goes into great detail on what the financial records would show if they used the alternative FAS 123.. Inc. Inc. The company has integrated FAS 142 but found that none of its existing intangible assets were in violation. as well as short term accounts receivable.” 12 Since the company uses the intrinsic value method they have not realized any expense related to the issuing of its stock to employees.. Policy Changes 10 Anheuser-Busch Companies. due to the fact that the stock is issued at fair value of the time issued. demand deposits. since this is required by the SEC.Pension Costs: Under FAS 87 Anheuser Busch must use three assumptions when computing estimated annual pension expense. They are accounted for by accrual accounting. 11 The company derives goodwill by dividing the excess cost of an acquired business over the fair market value of its net assets. Inc.. Accounting Discretion to Manage Earnings The company accounts for employee stock options using the intrinsic value method in accordance with APB 25. Published by the Securities and Exchange Commission 12 Anheuser-Busch Companies. These help Anheuser Busch determine a more accurate annual depreciation expense. 10 Anheuser Busch must use determined discount rates. Cash: Cash is considered money in banks. short term investments. while they must estimate the future rates of return. Intangible assets: Anheuser Busch has goodwill related to both consolidated business and equity method investments. orders already placed.

3. While GAAP requires a minimal amount of disclosure. Anheuser Busch clearly presents information such as their return over past years relative to the S&P 500 index. Step Four: Evaluation of the Quality of Disclosure Anheuser Busch takes pride in the disclosure of the firms accounting quality and their financial statements. such as domestic and international beers. stating that it complies with SEC staff accounting Bulletin No. Anheuser Busch describes the firm’s industry conditions and their future plans. They also briefly explain the companies break down. entertainment operations. 101.Anheuser-Busch made no changes in its accounting policies since the change in 2002 for goodwill required by the FASB. and community service.” They also provide brief information on 21 . Anheuser Busch’s footnotes summarize the firm’s revenue and expense recognition policies. In the letter to the shareholders. Anheuser Busch goes beyond this in order to inform its investors and the public about its operations. “Revenue Recognition in Financial Statements. packaging.

” and was therefore required ceasing the amortization of goodwill existing at the adoption date.other accounting principals and policies. “Goodwill and Other Intangible Assets. 142. In 2001. For example. consolidated goodwill and other intangible assets are now reviewed for impairment at least annually. they also give a good explanation as to why they made the changes. It also explains the operating results of the company stating its outstanding performance in the year 2002. Anheuser Busch maintains the quality of their disclosures by offering many different resources pertaining to the firms operations. as well as notes to consolidated financial statements. and future expectations of the company Step Five: Identification of Potential “Red Flags” Anheuser Bush has had changes in its accounting policies. 1. They failed to disclose any information that has a negative connotation toward the company. according to the Notes to Consolidated Financial Statements provided by Anheuser Busch. 2002 Anheuser Busch adopted FAS No. but when doing so they accurately describe why they have made this change. usually in the footnotes. Anheuser Busch does a good job of disclosing their changes in accounting policies. In lieu of amortization. They do this by creating valuable and factual information that is released to everyone. 22 . Anheuser Busch provides adequate and quality information to its shareholders and the public. goodwill was amortized to expense over a period of 40 years. The Management Discussion and Analysis summarizes factors affecting the company. There is an extensive amount of sales comparison from year to year.2. delivering 14% EPS growth. accounting policies. with ongoing recoverability based on applicable operating unit performance and consideration of significant events or changes in the over all business environment. it also explains the reasons behind their performance changes. Effective January 1.

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. Anheuser Bush has been performing at an optimal level which creates less of a reason to practice questionable accounting. but the flexibility was not used to distort the true performance of the company. There has also been a steady gap between their reported income and its cash flows from operations. The results show generally a favorable change in liquidity. There was no indication of misleading activity within the financial reports. and provided an accurate alternative benchmark for the accrual method of accounting. Each days 23 . Financial Statement Ratio Analysis In order to evaluate the financial condition of a company.There have been increases in accounts receivable and inventories. and help explain relationships. The statement of cash flows was concurrent with the disclosures in the footnotes. Quick asset and current ratio did not show any significant change. Anheuser Busch has used Price Waterhouse Coopers for many years. The company has disclosed all important information related to the firm’s year to year activity. show emerging trends. Accounts receivable turnover and inventory turnover both show favorable improvement. The flexibility of accounting methods were apparent in the financial statements of Anheuser-Busch. Being that no accounting distortions were revealed. but these are explained by an almost equal increase in sales. leading us to believe that they don’t “opinion shop” to better their financial statements. the financial statements must be analyzed and interpreted. there is no need for any adjustments or corrections to the financial statements. The following tables evaluate financial management performance. All methods of accounting flexibility were clearly explained in the footnotes to the financial statements. The liquidity ratios display the cash equivalence of assets and the firm’s ability to maintain enough near cash resources to meet debt obligations.

534.500= .36 days 14.200= .800/ -283.787.500/ Turnover -350.500= 14.320.973.400/ 16.550.675.547.686.94= (356/INV TO) 30.600)/ 13.900/ 1.46 15.38 365/ 14. 1999 (13.534.736.500/ 1.534.4 Accounts 13.200/ 600.973.445.64 days Inventory 7.800= N/A 24.973.000/ -186.320.500/ Receivable 629.200= 24 .914.87 365/ 12.700/ 1.900= N/A The profitability ratios evaluate operating efficiency.914.57 days Working Capital 13.600= 14.686.857.950.300/ 563.200/ 669.900/ 608.200= 48% 10.89 783.200= 46% 10.829.67 days 8.000= .131.15 days 7.18 days 14.000= 2002 (15.800= Turnover (COGS/INV) 11. rate of return on assets.700= .787.857.200/ -226.000= Turnover (Sales/AR) 22.534.92 760.400/ 1.973.400= (Sales/WC) N/A 2000 1.000/ 620.534.0007.736.88 365/ 24.45 14.300/ 1.600/ (CA/CL) 1.300/ 1.951.43 365/ 14. Basically.43= 25.586.88 860.181.914.700= .900= 2002 1.300)/ 15.400= 24.700/ 15.400= 2001 1.592.320.400= 2003 1.500= 46% 9.449.800/ 630.675.500 -7.45 14.100/ (QA/CL) 1. Liquidity Analysis 1999 Current Ratio 1.94 Days Supply of 365/ Inventory 11.700= .12 Days Supply of 365/ Receivables 22.100/ 587.000= .000= N/A 24.829.38= 25.914.947. or little change in the ratios.973.700= .400)/ 14.686.200= . and rate of return on equity.1= 15.686. Profitability Analysis Gross Profit Margin (Gross profit/Sales) Operating Expense Ratio (Op.8008.supply decreased with an improvement in efficiency.200= 2001 (14.800= 2003 (16.131.950.004.504.800= 48% 10.2 365/ 24.900)/ 14.1 365/ 24.43= 27.2008.08 days 7.320.630.29 days 15.87= 28.500= 2000 (14.46 16.320.2007.500/ 1.800= 13. asset productivity.914.88= 14.97 days 8.38= 14.400/ 591.43 365/ 13.84 819.600/ 623.700/ 14.500= .600. The working capital turnover is not applicable because working capital is negative.38 days 16.445.12= (365/AR TO) 16.686.2= 15.600/ 13.100)/ 16.000= 47% 10.951.82 Quick Asset Ratio 781.100= N/A 24.449.38 365/ 24.500/ 14.200/ -127.300= 12. the results show an increase.300/ 1.

199.200/ 1.000= 13.300/ 307.300= 63% 14% 2.300= 3.800= 2000 8.689.689.119.061.921.800= 12% 15.257. and is calculated using the liabilities and owners’ equity section of the balance sheet.072.900/ 3.704.551.500= 11% 1. which means that debt has become a larger proportion of total financing.200= 11% 14.402.933.320.686.600/ 14.135.933.1 1.200/ 14./Sales) Net Profit Margin (NI/Sales) Asset Turnover (Sales/Total Assets) 69% 1.200= 2002 11.551. The debt to equity ratio showed a considerable increase.119.704.500/ 13.200/ 13.200= 13% 16.500= 42% 14% 1.700/ 348. CF/ Current NP) 1999 8.300/ 401.1 1.07 1.500= 67% 2.08 2.711.500= 2.765.052.534.17 2.402.900/ 16.900= 1.494.900/ 2.900= 67% 1.933.200= 2001 9.723.800/ 15. Capital Structure Analysis Debt to Equity Ratio (TL/Equity) Times Interest Earned (NIBIT/Interest Expense) Debt Service Margin (Op.400= 69% 1.800/ 14.973.500= 10% 13.97 2.200/ No CNP= N/A 7.700= 1.500/ 4.16 2.718.200/ 13.800/ No CNP= N/A 7.075.914.22 2.977.075.551.800/ 3.128.200/ 3.Exp.700= 2003 11.500/ 14.900= 38% Capital structure refers to the sources of financing used to acquire assets.1 Return on Assets (NI/Total Assets) Return on Equity (NI/Equity) 1.500/ 12.970.600/ 4. It changed slightly from year to year.944.686.700= 77% 12% 1.500/ No CNP= N/A 7.534.500= 36% 12% 1.63 2.973.067.400/ 4061500= 2.640.800/ 2.061.700= 68% 1.800/ 4.48 2.900/ No CNP= N/A 25 .600/ No CNP= N/A 8.052.800/ 14.700/ 368.43 2.500= 7.42 3.400= 13.600/ 12.944.900/ 14.943.914.711.000/ 361.075.320.072.883.704.500= 2. Times interest earned indicates the adequacy of income from operations to cover required interest charges.979.200/ 3.402.700= 4.302.360.54 2.1 1.500= 1.500= 2.000= 11% 14.921.640.

) Leverage (Assets/Share Holder Equity) 1999 152.072.943.900/ 1. A positive sign for Anheuser-Busch is that the current ratio is increasing.22 13.640400/ (12. This also improved the liquidity of Anheuser-Busch because the faster collection means a shorter period of time that the company must wait 26 .200= . Another sign of positive liquidity is the increase of accounts receivable turnover accompanied by faster collection of accounts receivable over the five year period.100/ 1.689. it was found that Coors was almost twice as liquid on a short term basis.951.08 2000 159.500/ (14.63 14.50011.000= .600/ 1. Sec/Current Liab. it is an indication that they may not be able to repay their short term liabilities. When using AnheuserBusch’s main competitor as a benchmark for liquidity.857. Because the current ratio and quick ratio of Anheuser-Busch are both less than one.100/ 1.11 2003 191.10 2001 162.9009.119. 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.200)= 4.0. the liquidity performance of Anheuser-Busch was good.718.1 2002 188.700= . These steadily improving numbers are a good sign for creditors and are a good sign of effective credit management.675.640.500/ (14.800)= 5.17 13.63 14.067.400)= 4.072.500= . but with a negative working capital the company has a current ratio and quick ratio of less than one.700= .736.977.119. Overall.800)= 3.883.900/ (13.4008.944. and is nearing the industry norm of around 1.787.1 12.42 Ratio Analysis Liquidity. Profitability.50011.Other Ratios Cash Ratio (Cash+Mkt.700/ (13.900)= 3.689.900/ 1.944. according to the current ratio.7008.

the returns on equity have increased significantly. something that a prospective shareholder would be looking for. The forecasts for Anheuser-Busch should reflect the efficiency of the management that has been shown by the liquidity ratios. as shown in the calculation of equity efficiency. Profitability Assessing the profitability of Anheuser-Busch has given many indicators of future profitability as well as signs of current performance. This improvement in ROE is especially remarkable considering the returns recorded by Anheuser-Busch’s closest competitors. This is a significant indicator that Anheuser-Busch has made significant attempts at focusing on profit improvement.to turn its receivables into cash. The percentage return on equity in 2003 for Coors Brewing Company was not even one-fifth of the percentage returns made by Anheuser-Busch. The consistent ability to achieve returns greater than its competitors and returns in excess of 27 . we found another positive indicator of future profitability. Anheuser-Busch has shown significant growth in its return on equity. the overall liquidity of Anheuser-Busch is impressive relative to both the industry and to its main competitor. The accompanying decrease in the days’ supply of inventory shows that sales and inventory management are timely and efficient. Yet another trend that has increased the liquidity of Anheuser-Busch is the increase of inventory turnover. The returns made on equity investments over the last five years far exceeded the cost of equity capital. almost doubling its performance from 1999. Despite the fact that working capital was negative over the last five years and that the current ratio was lower than par. When comparing the return on equity to the cost of equity capital. This increase means that Anheuser-Busch has less cash and cash equivalents tied up in inventory. The most influential measure of profitability performance was an evaluation of return on equity. 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%). While the total amount of equity has decreased significantly since 1999. showing positive signs of long-run profitability for Anheuser-Busch.

which tells us that each dollar of assets produced only about one dollar of sales. but also has a trend of decreasing asset turnover. Another factor in the analysis of profitability is the operating efficiency. which remained virtually unchanged over the five year period. The other tools used to measure profitability for Anheuser-Busch were asset productivity and return on assets. we found the difference to be another indicator of Anheuser-Busch’s superior performance. This rate remained slightly over 1.0. Because market value to book value ratios are a key determinant of return on equity. and in addition to positive returns on assets and on equity makes Anheuser-Busch very attractive in terms of profitability. which decreased slightly over the examined period. Another measure of operating efficiency was the operating expense ratio. which is impressive considering how much additional assets were acquired with the lingering acquisition of China’s largest brewer. but at 67% it is still relatively high in comparison with Coors’ 21%. At a total net profit margin of 13%. When comparing the market value of equity to book value for Anheuser-Busch against Coors’. we also compared this ratio to that of Anheuser-Busch’s main competitor. The decrease was a positive sign of increasing profitability. The return on assets for Anheuser-Busch were also positive. Operating efficiency was measured partially by looking at the gross profit margin over the last five years. Net profit margin was also examined in the analysis of operating efficiency as an indicator of future profitability. This shows that Anheuser-Busch is able to make 28 . Coors Brewing Company. increasing slightly over the last five years due to increases in both gross profit and sales. something that will be taken into account when forecasting. this shows that Anheuser-Busch is retaining 13 cents of every dollar of profit. 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 net profit margin increased slightly at a rate of 3% over the last five years.the cost of equity capital is an indicator that Anheuser-Busch has a superior competitive advantage for its industry. Anheuser-Busch’s competitor Coors has a higher asset turnover. The consistent increase indicates an ability to earn future positive profits. Gross profit margin has been consistent. The consistent increase is an indicator of future ability to increase profit retention. which is detailed in the common size income statement. The asset productivity was measured using the asset turnover rate.

Anheuser-Busch can comfortably cover its interest expense. With over four times more debt than equity. we have determined that they have a strong capital structure. Capital Structure After evaluating the financial statements of Anheuser-Busch. and shows the ability to cover all of its interest expenses. 29 . This number is zero because there are no payments on the principal of debt required within the next year. a measure of profitability that is necessary for any industry. This is a factor that has a prominent impact on the management’s capital structure decisions. 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. The sustainable growth rate is another promising factor that shows that Anheuser has the ability to grow over 50% in one year. This also tells us that the managers are using their assets efficiently. but it is most likely due to a corporate tax shield that is available for debt financing. The reasons for a large amount of debt financing cannot be found in this quantitative analysis of the financial statements. Anheuser-Busch has little credit risk. With almost eight times as much income before interest and taxes as interest expense. This allows Anheuser-Busch to invest and take growth opportunities almost without limitation. However. something that is important for forecasting future profitability. the ability to cover interest expense becomes a concern. This shows that Anheuser-Busch has no need to use its operating cash income to pay off its debt.wise investments in its assets. The final measure of Anheuser-Busch’s capital structure was the debt service margin. This affects the sustainable growth rate by increasing return on equity and decreasing the dividend payout ratio. which was zero over the last five years. 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. these concern are overruled when we examine the times interest earned calculation. Another benefit of the high amount of leverage is that it focuses the management on creating value to the stockholders. as well as their profitability strategy. The comparably high D/E ratio appears to be a credit risk. The final result is an increased sustainable growth rate.

the financial ratios have determined that they have efficient and effective management.Summary After reviewing the past five years of financials for Anheuser-Busch. We interpret this to mean that the companies used in the average are not good representatives of our industry. and the liquidity and capital structure prove that Anheuser-Busch has the ability to meet all of its short term and long term obligations. Anheuser Busch is in a unique industry because we have diverse holdings and a diverse asset base. as well as a sound strategy and capital structure. the calculated price did not come closer than then actual price. and then did an average excluding the outliers. The results of analyzing these ratios should lead to positive forecasts for a promising future for Anheuser-Busch. 30 . The return on equity shows enormous opportunity for future profitability. Method of Comparables We did an industry average with all firms. We found that when excluding the outliers.

29 28.55 0. The Dividends to Price method was the next closest to the actual price.74 0.6 0.71 0.0406 0.0215 0. When taking out the outlier. The price to book calculation was the worst method used.55 0.19445 50.2 2.86 6.707 3.88 P/S 1.81 19.0406 0.499 0.6 0.86 6.54 n/a n/a 16. yet was still a poor method.81 15. 31 .71 0.029775 P/S 1.15 1.992 *highlighted section denotes outlier Without Outliers P/E Coors Red Hook Pyramid Diageo Kirin Industry Average P/B 14.74 0.62 0.029775 0. The Price to Sales method also does a bad job of calculating the actual price.0452 0.42 0.256926 D/P 32.54 n/a n/a 16.Method of Comparables Valuation P/E Coors Red Hook Pyramid Diageo Kirin Industry Average P/B 14. the price was ever further from the actual. 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.58 Method With Outliers A-B Price Method Without Outliers A-B Price Actual Price 11/4/04 P/E 53.2 1.48 2.728405 P/B 3.6025 Anheuser Busch EPS Book Value Dividend Sales 2.91352 P/S 18.0452 0.074 D/P 0.62 0.0118 n/a 0.48 2.42 0.0215 0.91352 P/S 11.43136 P/E 41. This does not go along with theory that taking out outliers from the industry average will bring the calculation closer to the actual price.29 28.691445 D/P 32.7 The price to earnings ratio with the outlier came closest to the actual price of 50.0118 n/a 0.055 D/P 0.98 18.81516 P/B 7.15 1.70.415 0.

6 1. The current assets may not be liquid making it more difficult to pay off its current liabilities. and it is difficult to find many firms in our industry that have similar attributes.8 1. Anheuser Busch can not efficiently cover its current liabilities from the cash gained from its current assets.8 Industry 0.4 0.4 A-B Ratio 1.2 0 1999 2000 2001 2002 2003 Years Anheuser Busch’s Current Ratio is lower than that of the industry and its competitors. Cross Sectional Analysis Current Ratio 2 1.Overall the Method of Comparables is not a good method to use for our valuation analysis. With a current ratio below one. 32 . This ratio shows that Anheuser Busch has a lower short term liquidity than its competitors and the industry average.6 0.2 Coors 1 R-H 0. This is primarily due to the fact that our industry is unique.

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 firm’s accounts receivables are liquid the current ratio is a better indicator of the firm’s ability to pay off its current liabilities.4 1.2 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.2 1 Ratio A-B 0.8 Coors R-H 0. Gross Profit Margin 60% 50% Percent 40% A-B Coors 30% R-H Industry 20% 10% 0% 1999 2000 2001 2002 2003 Year 33 .6 Industry 0.4 0.Quick Asset Ratio 1.

This large increase in ROE 34 . compared to its competitors. This means that the company is turning 48% of its sales into gross profit. 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 Busch’s investors are receiving a higher percentage return on their investment in the company. 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.Anheuser Busch’s gross profit margin is above the industry average at about 48%. Anheuser Busch is performing well compared to the industry and most competitors.

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.over the past few years leads us to believe that the company has become more profitable. It was 11% lower than last year’s quarter. We did this because although their sales have increased 35 . since around 2001 the economy has been decreasing. Debt to Equity Ratio 5 4. This may also attract potential investors allowing Anheuser Busch to expand its assets and become even more profitable. This may be due to the economy. When looking at Anheuser Busch’s trends and benchmarks. When forecasting for NOPAT margin we took the moving average of the past five years. there are many interesting facts that we took into consideration when forecasting.5 A-B 3 Coors 2. For every dollar of owners equity Anheuser Busch has been increasing its liabilities beginning around 2001.5 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. We took this and used it when forecasting for our fourth quarter. Taking this into account we used a weighted average when forecasting the sales growth.5 4 Ratio 3.5 R-H 2 Industry 1. When forecasting Anheuser Busch’s sales growth we recognized that over the past two years their growth has increased substantially. Financial Statement Forecasting Methodology When looking at Anheuser Busch’s previous 4th quarters we realized they have been somewhat lower than other quarters.

For our final assumption we used a simple average when forecasting for the beginning net debt to capital ratio. Also. This is true for several of the items in the balance sheet such as accounts receivables. The growth in things such as cost of products wasn’t very constant. We did this because when looking at our company’s debt to capitol ratios. The next assumption we made was for the beginning net long term assets to sales ratio. Strengths. our working capitol to sales has been relatively the same except for one small change. some items did show a growth trend. and other long term liabilities will increase by 5% each year.5% and level off. With the cash flow statement. Limitations.5%. Most of the items in the income statement were forecasted using a five year moving average. Cash and equivalents is forecasted to grow by 2. since the ratio hasn’t deviated a substantial amount. Debt and amortization. and then level off for the next five years. 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. 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. We thought taking a weighted average may not be the best solution since NOPAT has not had any drastic increases or decreases. With all their different ventures we believe that this is the best way to forecast. While forecasting for after tax net interest rate we simply used an average. Net issuance of stock uses a two year moving average. net issuance of debt. and intangibles. inventory. We forecasted these items to grow at a certain percentage for fives years. capital expenditures and purchase of businesses is forecasted using a five year moving average. so it seemed more reasonable to use an average to forecast rather than a growth rate. and Weakness of Forecast 36 . We used a simple average when calculating the Beginning net working capitol to sales ratio. However.their NOPAT has not increased as drastically. because Anheuser Bush has a great record of asset utilization skills. along with accounts payable. We used a simple average. and dividends is estimated to grow by 2. We did this since our debt to capital ratio has been relatively the same for the past five years. Long term debt is estimated to increase by 10% each year.

Everything from the capital structure decision to external security analysis is based on the valuation of the firm. it is critical to ensure that the estimates are accurate and realistic. it was easier to forecast using a variety of average formulas. and financial strategies of the company. affect the business. many methods were used to calculate the estimated value.One limitation of our forecasts is the fact that Anheuser Busch has been growing very rapidly. Using several approaches to the valuation process allows us to consider 37 . it could throw off many of our numbers. To arrive at a more accurate picture of the value of the firm. accounting. Once these forecasts were made we estimated the cost of capital to use as a discount rate for the forecasts. These decisions. and can be applied to various business strategies. Valuing the firm is important for many reasons. To properly and accurately value Anheuser-Busch. However. Also for many of our forecast models we didn’t have an exact number to go by so we had to infer a rate from years past. this is a good problem to have. and doing this is a difficult task. Anheuser Busch doesn’t have many competitors and that it is a difficult industry to get into. We then considered the terminal value by making estimates of the firm to the end of time. Since some of our subjects have stayed relatively similar over time. The Valuation Process The purpose of this section of the report is to convert our forecasts into an estimate of value of Anheuser-Busch. We had to forecast that eventually the growth will level off. its market share will be relatively constant for many years. Because so many decisions rely on valuation of the forecasted data. We forecasted financial information over a finite period of ten years. If we are wrong in our assumption. 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. This is the most accurate way of forecasting however it still leaves room for deviation. which will be made by the firm and by external entities. our valuation models considered forecasts over two different time horizons. 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.

The valuation methods to be used are as the method of comparables approach. These forecasts were made for a time period that spans the life of the firm. as well as potential investors a competitive advantage in the decision making process. Once again. a sensitivity analysis will be performed to test any differences in our valuation versus the value given by the market. the analyst must be careful in determining what a practical valuation of the company is. abnormal earnings model. All discounted models are discounted using the estimated weighted average cost of capital. Once the valuation models are complete and the accuracy of the estimated value has been assessed. This is a critical step for internal and external analysts. If our assumptions seem accurate and realistic based on the current business strategy of Anheuser-Busch. as well as free cash flows. than we will be able to determine if the market is overly optimistic or pessimistic about the future of the company. Because each model incorporates different financial data. According to the theory of efficient markets. as it will allow the entities to determine the real value of the company. and the discounted residual income. the discounted dividends model.all of the factors that affect the forecasted data. it will be necessary to look into how the differences came about. When the models are complete. 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. discounted free cash flows. If large differences arise in our valuation and the price given by the market. this competitive advantage can provide opportunities to make large gains in the market. and provides a solution to many of the deficiencies within the models. for both the firm and individual investors. we forecasted financial data based on abnormal earnings and book value. The sensitivity analysis should look into all of the assumptions made in our valuation and compare them to the assumptions made by the market. these assumptions must be based on realistic outcomes achievable by the company. 38 . We will then vary the growth rate and discount rate to determine how changes in our estimates would affect the outcome of our valuation. To implement the various models. long–term residual income model. An accurate evaluation will give the firm. the proper strategy decisions can more easily be made. all of which is forecasted based on different assumptions.

12 14. When manipulating the numbers we are able to get close to the actual. some of the models were extremely off.82 $ 22. This model can be 39 .53 5% 3% 0% $ $ $ 27.58 9% $ $ $ $ 98. and growth rates that make the price an accurate description of the firm.20 5% NA NA $ 74.40 9% $ 104.76% NA NA $ 90. Our estimated values show that Anheuser Busch may be undervalued.65 $ 45.87. Some of the other numbers come close to the price. Our sensitivity analysis shows that Anheuser Busch is undervalued.77 9.83 NA NA $ 83.14 15.48 $ 27. This model is one of the better indicators of actual price for Anheuser-Busch.93% NA NA NA $ 64.71 10. but not an acceptable price range.75 19.19 The dividend discount model is the worst representation of the actual price.32 $ 35.21 22.70 5% NA 2.33 2. When doing the sensitivity analysis for the residual income model. we found that there are a few costs of capitals. cost of equity growth rate 8% $ 10% 50. WACC 10% growth rate 8% 5% 3% 0% $ $ $ $ 43.50 6. The closest cost of equity and growth rate to the actual price was 8% and 10% respectively. our price came out to be $18. this is not surprising since this model is usually the worst estimate of actual price. However.32 $ 30.Sensitivity Analysis When doing the sensitivity analysis for each of the valuation models. WACCs. This is one of the better models for valuating Anheuser Busch.33 23.97 The free cash flow valuation method proves to be somewhat accurate using our estimated values. Using our estimated numbers.

77 $ 34.81 Long term residual income method is a somewhat accurate estimate of the actual price.38 $ 4.57 5% NA NA $ 64.accurate if the numbers are changed drastically.61 $ 6.76% NA NA NA $ 18. 8% 5% 3% 0% growth rate $ $ $ $ 10% 14.26 6.76% NA NA NA $ 81.01 cost of equity 9% $131. Anheuser Busch may be overvalued. This method shows a fairly good representation of Anheuser Busch's actual price.63 $ 9.44 $ 0.36 $ 2.32 cost of equity 9% $ 28.43 2. Overall this method proves to be an accurate representation of the actual price.76% NA NA NA $ 55. This method has a wide range of prices.91 5% 3% 0% $12.47 $ 49.61 $ 8. In general this is not a very good measure for actual price. the most reasonable costs of equity and growth rates show an accurate representation.94 $ 27. growth rate 8% 10% $14.38 4. growth rate 8% 10% $ 91. It also compares to the numbers we have estimated on the previous models.82 $ 29.97 5% NA NA $ 104.80 5.89 $ 24.90 5% NA NA $ 20.90 $ 22.74 2.67 $ 44.43 $ 9.77 5% 3% 0% $ 39. At our estimated cost of equity.94 2. However.84 $ 4.04 40 .86 cost of equity 9% $ 183.41 The abnormal earnings model proves to be a decent representation of the actual price.93 $ 26.

The cost of equity and growth rate that enabled us to get the closest to the actual price was 10% and 8. This method proved to be very inaccurate. the WACC is low mostly due to our negative beta. the Price to Earnings came within two dollars of the actual price. Overall this method of 41 .93%. Some of the models such as the Price to Book. However. However. Overall if you are able to distinguish which ratio is the best predictor of the price. Performance of the Models All of the models proved to be very useful in the valuation of Anheuser Busch. These are very reasonable numbers that can and are achieved by Anheuser Busch. Cost of equity is very low.Discussion and Analysis of Overall Valuation Results Beta and WACC When estimating our beta. meaning that our estimate is not very accurate. we calculated a -. Our R squared is essentially zero. Price to Sales. due to the fact that our beta is negative. The models can be found in the appendix at the end of the report. This model proves to be very efficient when valuating the price of Anheuser Busch. We evaluated and analyzed the data from each model. When computing the price using the method of comparables without the outliers. The first method that we used was the method of comparables. when doing the sensitivity analysis these numbers can be drastically changed. not close to the published beta. and the Dividends to price were very inaccurate.25% respectively. This weighted average cost of capital may not be very reasonable. The price was further away from the actual. The estimation of beta can be found in the appendix of the report. The next valuation method we used was the Residual Income model. The calculations for WACC can be found in the appendix. 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. Our weighted average cost of capital is 2. Therefore.1276. than it was with the outliers. the method of comparables would not be an invaluable tool when valuing Anheuser-Busch.

If the best choices aren’t used. the price will vary greatly. However. we find that for our forecasts are not as accurate as other models. When using the residual income model. but it is somewhat undervalued. When you change the cost of equity and growth rate it is possible to come up with an accurate model. When using optimal levels of cost of equity and growth we are able to accurately value our firm. the three dollars does not cover the usual 15% to say that the firm is actually undervalued. However. Most of our accurate models show that Anheuser Busch is undervalued by about three dollars. The other models do not seem to reflect the firm as well as the two that are already stated. This model came closer to the actual when using our estimated numbers for WACC and cost of equity. Yet. This price was about five dollars away from the actual price. the firm is very close to being valued correctly. According to our calculations Anheuser Busch may be slightly undervalued. but it is not outside of the 15 % limit. This method is the closest one to the actual price. It shows that our firm is extremely undervalued. this model is notorious for having inaccurate estimated prices. which according to most of our models is incorrect. This model proved to be inaccurate of our actual price. The next model was the Dividend Discount Model. This method is one of the best methods we have used to estimate the intrinsic value of our firm. This method can be very accurate to the right price when changing some of the numbers around. The Abnormal Earnings method proves to be a very accurate model. this is not very realistic of our estimates. the changed levels of cost of equity and growth may be unreasonable. This is evident in our method of comparables and our free cash flows model. 42 . It shows that the company is worth more that the actual price. However. After the residual income we used the Free Cash Flows model to value AnheuserBusch.valuation is very accurate if the right cost of equity and growth rate is used. Therefore. The free cash flow method also indicates that the stock may be undervalued by about five dollars. When changing the cost of equity and the growth rate we were able to almost exactly estimate the actual price.

Overall our models present an accurate estimation of our firm’s actual price. Our free cash flow model was very accurate however a limitation of this model is that if. when using these models you can change the cost of equity. if the firm had provided better financial information. but it makes for difficult valuation. and can vary greatly. WACC. Finally. However. Anheuser-Busch seems to be undervalued. One weakness of our method of comparables model is that when eliminating the outliers the price became farther away that of the actual. First. This makes for a low cost of equity. forecasting is a difficult process. made for a very accurate valuation. In addition. Also. an exact cost of equity and beta would have proven to be of great value to us when estimating our firm’s price. but if our information was more accurate our models could be even more exact. Also. First Anheuser Busch has a negative beta which is good. Results When using the applicable models.15% range. 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. This can help to give you a more accurate estimation of the value of the firm. and the growth rate. and weaknesses. We would have liked to have a few other bits of information to make our valuations more accurate.When looking at the overall results of the valuation there are a few strengths. This could have allowed us to estimate a much more accurate price of Anheuser Busch. More readily available information by the company would have been an asset to our valuation. If our forecasts were more accurate our models may have been too. all of the information that we had. One of the biggest strength of or models is that most of our estimated models fall in the +/. we would have fewer variations in our numbers. our forecasts are inaccurate so is the estimated price. this means that our company is pretty accurately valued. The models that were considered unjustifiable were so because they produced outrageous results that could not 43 . the most accurate forecasts possible would have been a great asset to us. Another limitation is that the dividends discount model is consistently inaccurate therefore it is unrealistic to rely on this method. and with a low cost of equity there is not a wide range to estimate a growth rate.

along with evidence from the valuation models. make it clear that Anheuser-Busch is undervalued. 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.be relied upon. 44 . The combination of solid financial data and positive business strategies that focus on growth and expansion.

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 • Altman’s Z-score 45 .