RD's Picks

As you've no doubt heard, Belgian brewing giant InBev is reported to be interested in buying Anheuser-Busch for somewhere around $65 a share. Neither company has confirmed the reports, so at this stage it's somewhere between rumor and a possibility.

Last week, BUD had a sizeable gain with a big gap higher at Friday's open on the reports. Today the stock held and added a little to Friday's gains, closing at $56.75. That puts it at a PE of 17.25 on estimated 2009 earnings.

I hold BUD both in SLO and real life and wanted to take a little closer look at the risk-reward and evaluate whether to hold, take some off the table or sell it all.

The potential upside is pretty easy. Barring an unlikely bidding war, the reports I've seen all say InBev is considering a $65 a share offer. So, from today's close there's another $8 a share or so of upside if the deal goes through.

The downside is a little tougher. The BUD buyout rumor has been floating around for some time, so there's no easy way to determine how long there's been a buyout premium in the stock. The stock hit a 52-week low of $45.55 in mid-March.

One reasonable approach to determine a current fair market value is to compare BUD to some companies that have similar characteristics, even if they're not in the same business. For this comparison I looked for companies that are well established and well known, have a relatively high dividend, have some risk of raw materials inflation, with moderate predicted growth and have a business model that isn't very sensitive to the economy.

Candidate benchmarks were McDonalds (MCD), Proctor and Gamble (PG), Kellogs (K), and Kraft (KFT).

Applying these four PE's to BUD's 2009 estimated earnings produces a market value range of $51.50 to $55.20. With a lower projected growth rate, BUD should trade at a discount to MCD and PG and in the same ballpark as K or KFT, so a reasonable fair market estimate is $51 - $52 a share. That puts the downside risk target somewhere between about $46 (recent low) and $52 a share.

For my IRA account the decision was pretty simple. My model for retirement assumes steady, moderate gains, so when a holding increases about 12% in less than a quarter, I need a compelling reason NOT to take some of the profits. In this case, I sold a third of the BUD position. If the buyout materializes, I will have made a nice profit on the third I just sold and a great profit on the remaining two-thirds. If it falls apart, I should be able to repurchase the shares quite a bit cheaper and continue happily collecting dividends. Either way, BUD should easily carry its share of the load this year. Sidebar - It's nice having a beer company pay me for a change.

For SLO, the decision was tougher. There's no real risk here and BUD offers nearly 15% upside IF the InBev deal materializes before the game ends. I have already sold some of my SLO position into the run-up and now it's tempting to buy it back and play for a big hit. However, I entered this competition to practice portfolio management and am going to take the same approach in the game. Take some profits now; buy back if there's no deal.

Any other BUD holders out there? Curious to know how others are playing these rumors.

Comments: View Comments |  Tuesday May 27, 2008  |  Stocks: bud,