3 Beverage Companies for Your Portfolio

Madhukar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Urbanization and middle class expansion in emerging markets like Brazil is propelling the beverage industry's growth. The global beverage industry is expected to reach a market value of $1.35 trillion by 2017 at a CAGR of 4.6%. This industry is highly competitive and customer loyalty is pivotal for beverage companies to earn profits.

Here are three beverage companies which are keen on maximizing their profit with growth strategies such as enhancing their presence in Brazil and new acquisitions to diversify their portfolio. 

Growth from new acquisition and innovation

On June 4, 2013, Anheuser-Busch InBev (NYSE: BUD) completed the acquisition of Grupo Modelo for $20.1 billion to grow in the Mexico region. It is one of the largest breweries of Mexico with 63% share of the Mexican beer market and has a strong distribution network with its brand, Corona.

Post the acquisition of Grupo Modelo, Heineken NVS and AB InBev dominate the Mexican beer market. Leaving aside the risk factor, Anheuser-Busch expects cost synergy of $1 billion over the next four years, 75% of which is expected by the end of 2014. Due to the acquisition, three year average revenue is expected to grow by 9%, which is expected to add around $0.35- $0.40 to EPS in 2014.

The hosting of the FIFA World Cup in 2014 and Olympic Games in 2016 will impact the growth of beverage companies; the government will allow the consumption of beer in the stadiums. To capitalize on the market, Anheuser-Busch will invest $1.32 billion in Brazil to increase its line of production.

Anheuser-Busch is one of the top beer brewers in Brazil with a market share of 68%. In the first quarter of 2013, the Brazil segment of the company faced headwinds as its beer volume in the region went down 8.2% year-over-year. Poor weather and higher food inflation were the key reasons for these headwinds. These conditions should only prevail in the short-term as food inflation dropped to 13% from 16% in March and is expected to reduce to 10% by the end of 2013. The company also expects better weather going forward. 

Developing revenue opportunities from developing economies

Over the last ten years, around 37 million people have entered Brazil’s emerging middle class. This has improved premium beer segment sales by 10% annually over the past five years. In this growing segment, Companhia de Bebidas das Americas (NYSE: ABV), commonly known as AmBev, became a leader with the launch of Budweiser in 2011 in Brazil.

To fortify its dominance in this segment, the company put together an impressive premium beer portfolio with the addition of Bohemia, Original, Stella Artois, and Norteña this year. According to Euromonitor, premium beer accounted for around 8.7% of total beer sales volume in Brazil last year. It is expected to grow to 9.3% this year and continue at a CAGR of 9.5% over the period of 2012-2016, compared to 5% growth of the total beer market in Brazil. With growth in the premium beer segment, AmBev’s Brazilian revenue is expected to increase from $9.2 billion in 2012 to $9.8 billion in 2013.

Last year, AmBev announced plans to merge its dual share structure of common and preferred shares into a single common voting structure to improve corporate governance and increase liquidity of stock. The shareholder meeting is scheduled for July 30, 2013, for the merger decision.

If approved, AmBev will increase the interest on equity by $1.85 billion, which will increase EPS by 11% and dividend yield to 6% in 2014, thus increasing shareholders' returns. According to Brazilian law, the country’s companies have to pay interest on equity, in addition to dividend to shareholders.

Growth from emerging economy and diversification

Fomento Econ (NYSE: FMX) and Coca-Cola's joint subsidiary, Coca-Cola Femsa, recently announced an agreement to acquire 100% of Companhia Fluminense de Refrigerantes for $448 million. Companhia Fluminense de Refrigerantes produces and distributes beverages like Coca-Cola, Fanta, Del Valle, and Kant. Femsa will use the deal to extend its reach in Brazil.

Last year, the company sold around 494.2 million unit cases of beverages. With integration, the company expects to increase sales in Brazil by adding coolers at retailers and increase points of sale. The agreement requires approval of the Brazilian antitrust authority and Coca-Cola. The acquisition is expected to generate cost synergies of around $14 million over the next 18 months-24 months.

Femsa's healthy balance sheet had cash and cash equivalents of $2.3 billion in the first quarter of 2013. This came from selling its beer business to Heineken NV in exchange for 20% stake in the company two years back. The company aims to continue diversification with the excess cash. Therefore, it recently acquired Farmacias FM Moderna, which compliments the acquisition of 75% stake in Mexico’s leading drugstore, Farmacias YZA, in May 2013.

With the acquisition of FM Moderna, Femsa will total around 444 drugstores in Mexico, including 111 stores of the acquired company. Mexico’s pharma industry represents opportunity of around $13 billion for Femsa. The acquisition is expected to increase EPS from $5.78 in 2012 to $6.82 next year.

Conclusion

All these top beverage companies are expected to benefit from growth in Brazil. Anheuser-Busch is confident of growth from its acquisition of Grupo Modelo and its market dominance in Brazil. AmBev is also betting on growth from the region in its premium beer product segment. The company also presents an opportunity for good investor returns on approval of merger of its dual share structure into a single common voting structure.

Femsa is looking forward for better prospects through diversification by adding a drugstore chain to its portfolio. Due to these strong growth strategies, a buy is recommended for all three companies. 

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Madhukar Dubey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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