Beer Bellies Increasing? Oh Yes They Are!
Cecil is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It's been quiet sometime since I've noticed an increase in the number of not so good looking bellies day by day. This observation is not just around me but I've been noticing them in various TV shows and news reports of people around the world. All of these thoughts came into perspective the minute I noticed the growth of the three largest brewery companies. Let’s take a look at what these companies have to offer besides their very tempting drinks.
A company known for its beer and their hilarious commercials is now well aware of the economy and the prospect of growth in various countries. It’s been a rollercoaster ride for Heineken (NASDAQOTH: HEINY) in the past few months; after fighting tough competition, they were able to finally acquire Asia Pacific Breweries. Heineken signed the final deal on August 17, 2012 with Frazer & Neave for a total of EUR 3.5 billion, thus acquiring APB. The leverage ratio is expected to increase from 2.2x (mid 2012) after this major acquisition.
Heineken had a below par performance in the first half of 2012 and expects flat earnings on an organic basis for the rest of the year. Beer volume consumption grew organically by 2.6% in the first 9 months of 2012. But, Heinekens third quarter performance fell short of what analysts expected. Besides strong growth in volumes, Heineken was weak in the European market. The African market still promises a bright future and the joint venture with APB has already developed strongly as far as its Asian market is concerned.
Undoubtedly the world’s largest Brewery, Anheuser-Bush Inbev (NYSE: BUD) , has an impressive portfolio with emerging and developed markets. They’ve been known for their cost savings and brand building which provides the strongest future as far as breweries are concerned. ABI is able to tap into key markets and maintain a strong position at the end of the day. Key markets include Brazil, Argentina, USA and Ukraine. Investors had their eye brows raised when ABI agreed to buy 50% stake in Modelo for a whopping $20.1 Billion in June 2012, after analysing Modelo’s business prospective “Corona” hitting the market as a global brand, investors feel the price tag is more or less a pretty decent one. The downside to all of this is the fact that ABI has decided to push the takeover of SABMiller to a distant future. This would mean no rise in the cash returns for shareholders, well at least for now.
ABI’s strong portfolio accompanied by their good enough regional spread sends a positive message to its investors, with the EBITDA margin now approaching 40%, it’s the highest in the sector. The company is set to normalize it’s price level which most probably will be a positive as far as the share trend is concerned.
2nd largest in brewer in the world, SABMiller (NASDAQ: SBMRY) has conquered many key markets including Columbia, Peru and South Africa. This is a good enough reason to explain SAB’s high margin potential. Just like the above two giants SAB was also involved in a major acquisition, in September 2011 SAB bought Australian giants Foster’s Group for AUD 12.66 billion. Keep in mind Foster’s Group dominates the Australian market with 50% market share and an EBIT margin of 35%. Due to the predicted market in developed countries, Foster’s always banked on their pricing for their earnings.
SAB fetches 70% of their sales from emerging markets. They’ve been riding on these markets for a long time and it still looks bright for them. SAB's margin is low compared to AB Inbev’s, this does indicate that there is scope for improvement as far as cost savings is concerned.
It’s pretty evident that all three giants are keeping a close watch on the markets. Countries like China now constitute one in four of every beers sold; this was not the case a few decades back. There still exists immense potential as far as emerging markets are concerned. I’d still give it some more time though, the next major acquisition by any of these three giants would definitely play an important role in capturing potential markets. Hence, keep an eye out on any announcements or rumours about the same. For now I’d wait for a year on choosing the right company as far as investment is concerned.