This Beer Giant has Room to Grow
Daniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Especially now, during times of economic and financial turmoil, I favor large cap names producing goods and services that people use on a daily basis. I will make no secret of the fact that I regularly indulge in a frosty brew, and I’m quite sure I’m not the only one.
Living in the Netherlands, one of the things we pride ourselves on is the quality of our beer. While one could argue that Belgian beer is finer still, we have a number of very famous breweries in our tiny land. One of these is Heineken NV (NASDAQOTH: HEINY), which produces one of the world’s best known beers. The stock has performed very well this year and seems poised to become a major player in Africa and the Middle East, as well as Asia and Latin America.
With a market cap of nearly 25 billion Euros, Heineken is a serious mover in the global beer market, and it is one of the world’s most recognized brand names. They reported an EPS of 2.44 Euros over 2011 with a better than expected 6.1% increase in revenue. The stock trades in Amsterdam at a P/E of 14.66x and a price to book ratio of 2.32. It has quite a nice ROE of 16.2% and a dividend yield of about 2.3%. Heineken also has a beta of only .71 making it a lower volatility play.
The three largest beer corporations in the world today are Anheuser-BuschInBev (NYSE: BUD), SABMiller (NASDAQOTH: SBMRY.PK) and Heineken. Some valuations for Heineken’s competitors are as follows: Anheuser-Busch trades at 17.55x earnings with an ROE of 17% and 2011 EPS of 3.64 EUR. SABMiller is valued at 15.6x earnings with an ROE of 18.6% and 2011 EPS of 2.67 pounds.
Heineken is strong in Africa and the Middle-East, but through mergers and acquisitions the firm is trying to increase its market share in Asia and Latin America as well. Heineken’s 2010 take-over of FEMSA Cerveza strengthened its position in Mexico and Brazil and the firm now gets about 40% of its revenue from emerging markets. To support growth in Asia, the Dutch beer brewer has made a bid of $4.07 billion on Asia Pacific Breweries, which may unleash a bidding war with ThaiBev over the producer of Tiger beer among other brands. The company is confident that, if completed, the take-over would produce great long-term financial and strategic benefits for its shareholders.
While Heineken has a strong position in today’s market, it faces stiff competition from its rivals. Anheuser-BuschInBev, the world’s largest producer of beer, earns 50% of its revenue in emerging markets. It has a dominant position in its key markets of Brazil, the United States and Argentina, and is also well positioned for growth. SABMiller, Heineken’s main European competitor with brands such as Castle, Miller and Grolsch, also has a great deal of market share in Europe and the United States.
Other risks to consider are Heineken’s remaining dependence on saturated markets in the US and Europe, which are still good for almost half of the brewer’s revenue. High commodity prices are also hurting margins and reduced consumer spending in the Eurozone may hurt sales in the future.
In summary, Heineken seems like a valuable stock for long-term investors who prefer low volatility. The company remains well positioned for profitability in 2012 and continues to improve its market share in emerging economies. Still, the company faces certain challenges in no small part due to its tough competition. Overall the consumer staple sector has held up well during the crisis, and companies producing these goods continue to outperform the market at the moment. If relative stability with rising strength in emerging markets is what you’re looking for, this beer brewer might be for you.
DUJames has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.