Beer: The New Coke?

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What’s your beer of choice? While I prefer Flying Fish’s Summer Ale, I’ll gladly enjoy an Anheuser-Busch InBev (NYSE: BUD) brew, such as a Bud or Corona, or a beer from other major producers, such as Heineken (NASDAQOTH: HEINY)

Let's look first at demand:

#1. Have Heat, Will Drink -- Beer

An ice cold beer hits the spot on hot evenings, don't you think?

I've recently written articles on stocks that I believe will benefit from the long-term warming trend, namely water stocks and irrigation stocks. You know where I'm going, right? Yes, I do believe beer stocks have been getting a little kick from this unseasonably warm weather we've had in the US for two years now. I have no proof, but know that I favor beer over wine when it's hot and know others who feel the same.

It's only anecdotal, but when I was in the local -- and large -- liquor store recently, I casually asked the owner, "How's business?" His response: "Beer and ice, that's all we're selling with this heat."

#2. Have New Money, Will Spend

The real demand driver is the exporting of American taste -- and drink -- buds. The middle-class is growing quickly in the emerging markets -- and this middle class is hungry and thirsty for foods and beverages they couldn't previously afford. 

Sure, Europeans consume, but nothing says "consumerism" more than American-associated brands. This is why AB InBev -- the #1 beer company in the world -- should do particularly well in the emerging markets. AB InBev isn't a US company, but I'd bet many people here in the US don't even realize that the iconic American beer, Bud, is now made by a foreign company. Regardless, Bud still says "Americana."

Take One Down…and it’s likely Made by AB InBev  

Three facts illustrate AB InBev’s dominance of the American beer market:

  • It has about a 50% market share.
  • 7 of the top 10 selling beers in America are produced by AB InBev (#1, 2, 5-8, & 10).
  • Its #1 beer alone, Bud Light, generates more revenue than the 3 beers in the top 10 produced by other companies.

10 Bottles of Beer on the (US) Wall

The Top 10 selling beers in America:  

<table> <tbody> <tr> <td><strong>Brand                        </strong></td> <td><strong>Producer                                 </strong></td> <td><strong>2011 Sales* ($)</strong></td> <td> <p><strong>Annual Sales Change (%) </strong></p> <p> </p> </td> </tr> <tr> <td> <p>1. Bud Light </p> </td> <td>AB InBev</td> <td>5,327,145,000</td> <td>1.33</td> </tr> <tr> <td>2. Bud </td> <td> <p>AB InBev</p> </td> <td> <p>2,072,380,000</p> </td> <td> <p>-1.91</p> </td> </tr> <tr> <td>3. Coors Light   </td> <td> <p><strong></strong><strong>Molson</strong> <strong>Coors<span class="ticker" data-id="206318">(NYSE: <a href="http://caps.fool.com/Ticker/TAP.aspx">TAP</a>)</span> </strong></p> </td> <td> <p>1,946,762,000</p> </td> <td> <p>3.72</p> </td> </tr> <tr> <td>4. Miller Light</td> <td> <p><strong>SABMiller </strong><span class="ticker" data-id="214889">(NASDAQOTH: <a href="http://caps.fool.com/Ticker/SBMRY.aspx">SBMRY</a>)</span></p> </td> <td> <p>1,672,598,000</p> <p> </p> </td> <td> <p>-0.47</p> </td> </tr> <tr> <td>5. Natural Light</td> <td>AB InBev</td> <td> <p>1,089,709,000</p> </td> <td> <p>-2.8</p> </td> </tr> <tr> <td>6. Corona Extra</td> <td>AB InBev</td> <td> <p>964,968,900</p> </td> <td> <p>5.34</p> </td> </tr> <tr> <td><span>7. Busch Light     </span></td> <td>AB InBev</td> <td> <p>735,397,100</p> </td> <td>0.34</td> </tr> <tr> <td>8. Busch</td> <td>AB InBev</td> <td> <p>684,463,700</p> </td> <td> <p>1.98</p> </td> </tr> <tr> <td><span><span>9. Heineken </span></span></td> <td>Heineken<strong> </strong></td> <td> <p>577,453,300</p> </td> <td> <p>1.27</p> </td> </tr> <tr> <td><span>10. Michelob Ultra Light   </span></td> <td> AB InBev </td> <td> <p>518,075,100</p> </td> <td> <p>10.32</p> </td> </tr> </tbody> </table>

 

Lots of Bottles of Beer on the BRIC (minus I) Wall

BRIC is an acronym for the four largest emerging markets: Brazil, Russia, India & China.

China is the largest beer market -- yup, currently. The US is the #2 largest market; Brazil, Germany, and Russia round out the top 5.  So the BRICS account for 3 of the largest 5 beer markets -- and there's plenty of room for growth both in market size (China) and market share (China and Russia).

<img src="/media/images/user_13269/beer_large.jpg" />

               

AB InBev: The Coca-Cola of the Beer World

AB InBev, the largest beer company in the world, was formed in 2008 when Belgium-based In Bev bought US-based Anheuser-Busch. 

Naysayers have been saying for years that beer stocks are not such a good bet. The reasons cited:

  • The US and European markets are mature, no growth markets.
  • Wine is gaining market share at the expense of beer in the US.
  • Microbreweries are stealing market share from the major beer companies.

These are solid reasons. However, these reasons could have also been used as an argument against buying Coke (NYSE: KO) stock many years ago. Just substitute sports drinks, flavored waters, and iced coffees for wine; and companies such as Monster Beverage for microbreweries. (As for microbreweries, Craft Brew Alliance bares watching, though it needs to increase its margins. Boston Beer, an early Foolish find and huge winner, currently looks too richly priced.)   

Coke's growth -- and its stock's nice ride -- in more recent years has largely been due to:

  • Growth in foreign markets, especially emerging markets
  • Economies of scale as it got larger

Those same reasons are why AB InBev's stock has room to grow. Granted, there are only two major cola companies -- Coke and Pepsi. (Don't pelt me, Dr. Pepperites!) But there are only a handful of publicly-traded major beer companies -- and I'd guess further consolidation could occur in the near future.

One caveat about BUD's stock -- it has had a tremendous run-up over the past 1-year period (54% to Aug. 6).  So, valuation-wise, it may need time to catch up with itself. We'll get to the stock stats soon.

AB In Bev Sliced and Diced...

      

<img src="/media/images/user_13269/bud-rev_1_large.jpg" />
 

    

<img src="/media/images/user_13269/bud-editda_large.jpg" />

Margins are considerably higher in the US than overall, as per the 31% revenue to 43% EBITDA (earnings before interest, taxes, depreciation, and amortization). And margins in China and Central & Eastern Europe are considerably smaller than average. This is to be expected as the company builds a foothold in these newer and less affluent regions. Margins should slowly start to increase. The company has the financial might  -- thanks to its enviable positions in the North America and Latin America North markets -- to invest in these regions. 

 

<img height="567" src="/media/images/user_13269/bud-by-country-2_1_large.jpg" width="674" />

Based on data contained in Annual Report. * Contains mixed beer/non-beer plants. ** Includes Switzerland & Austria.

Stock Stats for Major Beer Companies 

<table> <tbody> <tr> <td> </td> <th>BUD</th><th>HINKY</th><th>SBMRY</th><th>TAP</th></tr> <tr> <td>Market Cap</td> <td>131.0B</td> <td>32.6B</td> <td> n/a</td> <td> 7.6B</td> </tr> <tr> <td>P/E (ttm)</td> <td>18.7</td> <td>19.0</td> <td>17.0</td> <td>11.5</td> </tr> <tr> <td>Dividend Yield (%)</td> <td>1.6</td> <td>2.1</td> <td>0.5</td> <td>3.0</td> </tr> <tr> <td>Qtrly Rev Growth (yoy) (%)</td> <td>-1</td> <td>2</td> <td>10</td> <td> 0</td> </tr> <tr> <td>Qtrly Earnings Growth (yoy) (%)</td> <td><strong>35</strong></td> <td>10</td> <td><strong>121</strong></td> <td>-4</td> </tr> <tr> <td>Gross Margin (ttm) (%)</td> <td>58</td> <td>37</td> <td>69</td> <td>42</td> </tr> <tr> <td>Operating Margin (ttm) (%)     </td> <td>32</td> <td>13</td> <td>24</td> <td>13</td> </tr> <tr> <td>Profit Margin (ttm) (%)</td> <td><strong>18</strong></td> <td>8</td> <td><strong>25</strong></td> <td><strong>19</strong></td> </tr> <tr> <td>PEG (5 yr expected)</td> <td><strong>1.3</strong></td> <td><strong>1.0</strong></td> <td>2.2</td> <td>5.4</td> </tr> <tr> <td>Beta</td> <td>0.85</td> <td>n/a</td> <td>n/a</td> <td>0.71</td> </tr> </tbody> </table>

 

What stands out?

  • All but TAP experienced a nice widening of margins in the most recent quarter. Of course, one quarter is not meaningful enough. Notably, BUD's EBITDA margins have increased in every quarter since the company was formed in 2008.
  • BUD and HINKY are the best values on a PEG basis, however look at BUD's profit margins vs. HINKY's.

Bottoms Up to the Bottom Line

Though BUD's stock may currently be a bit pricey, it looks like a moderately attractive longer-term investment. The sustainable demand factor is the fast-growing middle class in the emerging markets, particularly China.

While it doesn't have the growth potential of a smaller cap stock, the stock sports a decent balance of growth potential with conservative features, such as a dividend and a slightly less than average stock price volatility.

But the biggest possible winner in beer stocks? Any smaller company fortunate enough to be bought out by the likes of a BUD or HINKY. 

 




BAMcKenna has no positions in the stocks mentioned above. The Motley Fool owns shares of The Coca-Cola Company. Motley Fool newsletter services recommend Molson Coors Brewing Company and The Coca-Cola Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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