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Tickers in this Article: BUD, HANS, BRK.A, BRK.B
It is not difficult to imagine that Anheuser-Busch (BUD) would like to forget its 2005 performance, one which saw flat revenue growth and an across the board decline in margins. For fiscal 2005, the company saw its sales increase a paltry 0.68% to $15 billion, which is a considerably lower growth rate than the average increase of 5% that Anheuser-Busch saw the previous three years (2002-2005).

To make matters worse, Anheuser-Busch saw costs increase at a much higher rate than what had been seen in prior years. The company's cost of revenue increased by 6.6%, as it was impacted by higher aluminum and energy prices in the commodity markets.

Anheuser-Busch also saw its costs increase on the operational side as both revenue and distribution costs increased during 2005, leading to a 5.4% rise in marketing, distribution and admin costs.

In numeric terms, these increased costs led to 9% decline in gross margins and a 20% fall in the company's operating margins, resulting in a 19% decline in net income for 2005, the first decline in five years. And as one can imagine, shares were punished for this weaker performance falling nearly 15% during 2005.

The blame can't solely be placed on Anheuser-Busch and its management as it is currently suffering from a poor macro-trend in U.S. alcohol consumption.

A trend that has seen U.S. consumption shift more and more from domestic beers to wine, hard liquors and foreign beers. But if this trend continues and consumers don't come back to the domestics, a more extensive shift in strategy will be required for the company.

This has led to a lot of market chatter on what Anheuser-Busch could do to grow its revenue, including a further move into the non-alcoholic beverage space. The hottest beverage segment over the last few years has been energy drinks, which has been well documented by the meteoric rise of Hansen Natural (HANS).

This producer of energy drinks, which has seen its shares rise nearly 10,000% in a little over three years, has been rumored to be a potential takeover target of Anheuser-Busch. And while it may seem far fetched that a beer maker would enter the energy drink market, Anheuser-Busch already has its own line of energy drinks, but is a relatively unknown brand. While this acquisition would help revenue growth, as Hansen saw its top line numbers grow by nearly 100% in 2005, it will come at a high cost. Hansen is currently trading at 9x sales and there is the real risk that the energy drink space is just a fad.

Recently, at the National Conference of State Liquor Administrators, Anheuser-Busch's president of U.S. beer operations stated that "if this trend continues, we at Anheuser-Busch will have to re-evaluate our business model going forward in terms of expanding beyond beer and broadening our position within the total alcohol industry." This is clearly hinting at a move towards an entrance into the liquor market, which could include acquisitions into wine and spirits. The right acquisition should be well received by the market, but does open up the company to acquisition risk such as poor integration execution.

All this acquisition talk and moves into other spaces may all be for nothing as Anheuser-Busch has seen much better sales growth in the first quarter of 2006. Revenue for the first quarter jumped 5.4% to $3.76 billion compared to first quarter sales of $3.56 billion in 2005.

So with revenues increasing at historical rates, is it a good time to get into Anheuser-Busch?

On the positive, the company has nearly 50% of the domestic beer market and a very attractive portfolio of international beers, including several in fast growing China. It also has one of the greatest investors backing its shares with an investment of nearly $2 billion by Warren Buffett and Berkshire Hathaway (BRK.A).

On the negative, the company could still see continued weakness in domestic beer demand along with increasing costs, which would eat away at the company's top- and bottom-line.

With Anheuser-Busch trading at the lower end of its five year trading range, and shares paying a dividend of 2.4%, Anheuser-Busch deserves a closer look.

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