There's 99 Bottles of Beer on the Wall...

By Maxxwell A.R. Chatsko - June 5, 2012 | Tickers: BUD, SAM, TAP | 0 Comments

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The other day I stumbled across the Forbes Billionaires List, which is an amusing way to kill time. The sources of each net worth are listed, which read something like “Microsoft, Mining, Steel, Cork ("Cork?"), Mining, Retail, etc.” I was a little surprised at first when I saw “beer” thrown into the mix between the obvious ways to build a fortune. As you scroll down you’ll notice it appears five times (#69, #97, #120, #178, and #196) before you get to Richard Branson at #255 and his $4.2 billion fortune.

The more you think about it the more it makes sense. Beer (or alcoholic beverages in general) is a social centerpiece in many cultures. Meanwhile, the alcoholic beverage industry is stable, mature, and certainly not going anywhere any time soon, which makes it a great place to look for investment opportunities. Let’s begin by comparing the basics of three recognizable beer companies:

That doesn’t tell us if any of these companies are growing and merit an investment, so let’s dig a little deeper.

If The Motley Fool had an IPO…

When James Koch took his Boston-based brewing company public in late 1995 every major bank in the country put him on their blacklist. Motivated to give his loyal customers a share of his company, Koch put flyers on cases of beer notifying buyers that they would be able to purchase (by mail) a block of 33 shares for $15 each. Since then shares have returned 248% or 7.6% each year for nearly 17 years. Buy and hold investing is a beautiful thing. So where is the company headed?

The good news is that Boston Beer has increased profit margins from 2% in 2008 to 12.9% in 2011 and has no debt. Moreover, the company has brand loyalty and is a staple tap at many bars and restaurants. The bad news is that the company is trading at 6.9x fair book value ($15.16 per share). Many companies trade above book value, but the bigger the multiple the more likely they are to collapse at the first sign of trouble. The company does have only 13 million shares outstanding, which could work in its favor. However, I would wait to put my money here and instead keep looking around the industry.

The King of Beers

Several years ago I went on an engineering tour of Anheuser-Busch’s Baldwinsville, NY facility – it’s largest and third youngest. The experience is difficult to put into words except for “Wow.” Can you really go wrong with Anheuser-Busch? The company offers Budweiser, Michelob, Shock Top, Stella Artois, Landshark, Bass, Beck’s, and other brands. It maintains a 47.7% stranglehold on the United States market. It has reduced water usage by 34% in the last three years. And oh yeah, it sells “The King of Beers.”

Management has made strides in reducing debt and maintaining costs in the past four years. Profit margin has risen from a low of 8.2% in 2008 to 15% in 2011 while debt to assets has fallen from 52.8% to 35.7% over the same period. That is still pretty high, but the company is targeting much lower debt in the next several years as one way to continue creating value for shareholders.

Despite the company’s price to book multiple of 4.5 and the fact that it is trading near five year highs it is still investment worthy. Why? A sustainably increasing dividend and focus on increasing financial flexibility means Anheuser-Busch is a likely long term winner. But with all of the companies in the industry I wonder if we can do better...

Should investors put Molson on tap?

A slew of questionable downgrades have lead to a questionable selloff in Molson Coors, which continues to hit new 52-week lows. Analysts report concerns over the company’s YOY 0.1% increase in first quarter revenue leading to “stagnant gains in income.” Ugh? Last time I checked 0.1% is pretty stagnant itself, but that’s what happens when computers generate your reports.

In addition to its flagship brand the company also sells Blue Moon, Corona, George Killian’s, Heiniken, Miller, Keystone, and other diverse brands. The lineup is an instant rival to Anheuser-Busch and should power growth moving forward, as non-core brands generate higher profits due to decreased advertising. Still, the company lost market share in Canada to the tune of 0.5% as the industry grew 1.3% in 1Q12 and has suffered from declining profits since 2009.

Although it’s a cause for concern I think worries may be overblown. The company is trading at 0.89x book value ($43.21 per share, 13.7% premium to $38), which is unusual for the industry and a dividend that handily beats the S&P500 (3.34% vs. 2.14%). At the same time management has increased shareholders’ equity 58.2% since 2009 by paying down debt and repurchasing shares. To me, Molson Coors is the best current investment in the industry.

Foolish bottom line

Even though beer is a staple of Western culture, investors need to do their homework before blindly investing in the industry. Trying to decipher trends in graphs won’t get you very far without consulting a company’s balance sheet and understanding plans for future growth. And despite premature headlines it also helps to have a buy and hold mentality. Unfortunately, investing in a beer company probably won’t admit you to the Forbes Billionaires List. But it could provide some easy, summer-time sipping profits for years to come.

Did you enjoy this article? Follow me on Twitter to keep up with my future posts on value opportunities, energy, and sustainable chemicals @BlacknGoldFool. *All charts and financial data from Google Finance.

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