T2's Tilson Makes the Case For Blue Chips: Anheuser-Busch (BUD), Microsoft (MSFT) and BP (BP)

July 21, 2010 11:37 AM EDT

In a recent presentation, Whitney Tilson of hedge fund T2 Partners made the case for three big-cap blue chip stocks: Anheuser-Busch InBev (NYSE: BUD), Microsoft (Nasdaq: MSFT) and BP (NYSE: BP).

On BUD, which was formed from the merger of Anheuser-Busch and InBeve, his investment thesis is:

• Stable, high quality business with pricing power.
  
• Best of breed, owner-oriented management
  
• Density in major markets creates high margins, returns
  
• Pro forma for deleveraging and synergies, trades for 9.3x 2012 free cash flow.

On Microsoft, Tilson said the rumors of their demise are greatly exaggerated. Tilson notes:

• Cash per share of $4.24
  
• 2010 expected earnings $2.20
  
• Historically cheap multiple of 10.5x trailing, 8.9 forward
  
• Currently on the front-end of a large new product cycle - MS Office 2010 MS Windows 7
  
• A key player in emerging themes including: Cloud Computing/Virtualization, Mobile, Search
  
• Shareholder friendly capital allocation including share buybacks and dividend
  
• Assuming $2.40/share in 2011 earnings and $4/share in cash a 10x multiple could get you to $28/share (13% return), 12x could be $33 (33% return) and 15x would be $40 (61% return)

On BP, Tilson said the company can earn its way out of spill liabilities.

• Current spill liability estimates average around $30 billion and the high estimate is $70 billion, while operating income is estimated to be $34 billion in 2010.
  
• says Merck's (NYSE: MRK) Vioxx crisis in 2004 is the best analogy. Early speculation was the Merck's liability could be as high as $50 billion. Stock dropped form $45 to $26 in less than two months. Merck ended up settling nearly all claims for $5 billion and stock rallied to over $60 in subsequent three years.
  
• Expects liquidity to remain strong.
  
• Assuming $6/share in 2010 EPS a 8x multiple gets you to $48/share (31% return), 9x gets you $54 (47% return), 10x gets you $60 (63% return).

Tilson's full presentations on Anheuser-Busch InBev, Microsoft and BP can be found here.

Tilson is also offering a special offer to attend the New York Value Investing Congress October 12 and 13 in New York. You can save$1,800 off the regular price of admission! Go by going to: http://www.ValueInvestingCongress.com/register and use discount code N10V11.

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