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Sip the suds, buy the stocks
You may sip a few brews this Fourth of July weekend, but take a look at the stocks, too. Go for growth in tiny Boston Brewing or for value in Coors.
By Robert Walberg
Over the next few days, we will celebrate our countrys independence, and we will do so by flying flags, going to parades, barbecuing hotdogs and hamburgers, watching fireworks and downing bottle after bottle of beer.
According to The Beer Institute, typical Americans consume about 22 gallons, or nearly 235 bottles, of beer per year. That seems a relatively conservative number to me, especially after spending the last few days in bars observing drinking habits. The youth of today can certainly pack em in.
Interestingly, despite what seems like an obvious jump in beer consumption by the under-30 market, total beer consumption in this country is actually growing fairly slowly.
Beer sales have risen in each of the past seven years, but the growth rate is under 2% a year. Domestic beer sales are essentially flat, as most of the growth over the past 10 years has come from the import market, where the Adams Beverage Group, a company that produces a number of publications on the beverage alcohol industry, notes that case sales have nearly tripled. Theres also been a notable shift toward light beers. A category that didnt even exist 30 years ago now commands almost 46% of the beer market. In addition, according to Adams Beverage Group, four of the five top-selling beers in the United States are light beers.
Given the American obsession with dieting and low-carb alternatives, light beers should continue to gain market share in the years to come. Thats essentially good news for Anheuser-Busch (BUD, news, msgs), which dominates the market with its Bud Light, Michelob Light and Busch Light brands. Anheuser-Busch has also responded aggressively to SABMillers (SBMRY, news, msgs) challenge in the low-carb area by pioneering with Michelob Ultra and advertising the taste advantage of its leading Bud Light brand. The King of Beers is also taking steps to ensure that it doesnt miss out on the import craze, as it recently bought one of Chinas leading breweries for nearly $800 million.
More growth or more value?
When you size up the players in the U.S. beer market, it reminds you of the old taste great/less filling debate between Anheuser-Busch and the old Miller Brewing, which is now part of SABMiller.
Except when it comes to analyzing the stocks, its more like growth versus value. On the one hand, theres Anheuser-Busch. Roughly half the beer consumed in the United States comes from this St. Louis-based brewing giant. Over the past decade, the company has exploited its size and distribution muscle to gain market share. Those gains have been reflected in its stock price; Anheuser-Busch shares have risen by more than 300%. Thats nearly double the gain of the Standard & Poors 500 index ($INX).
The companys operating margin of 22.7% and its return on equity of 79% are also far and away tops in the industry. One reason for this is the pricing power that comes from its size. Despite its size, or maybe because of it, the company continues to deliver solid top- and bottom-line growth. Over the last fiscal year, revenues grew by a somewhat pedestrian 4.3%. However, earnings this year are seen growing 11.7% to $2.77 per share. Anheuser-Busch is expected to post double-digit earnings growth again in 2005, with earnings hitting $3.06. Corresponding valuations are relatively high, as the company sports a price/sales ratio based on trailing 12-month sales of 3.02 and a forward price/earnings ratio of 19.5. But investors are willing to pay up for dependable growth, and, over the past several years, Anheuser-Busch has been able to give investors what they paid for.
There are some reasons to question the companys ability to maintain its performance going forward. - Debt is climbing.
- Cash reserves are dwindling.
- Accounts receivables are climbing faster than sales.
Alone, none of these factors would be an overwhelming concern, but, together, they suggest that the financials are deteriorating. And thats not great news for investors, especially considering the premium price theyre being asked to pay for the stock.
The little brewer that could
Another growth alternative in the sector is The Boston Beer Co. (SAM, news, msgs). This relatively-small East Coast brewers flagship product is its Samuel Adams Boston Lager. During fiscal year 2003, the company sold 22 different beers under the Sam Adams brand name, none more important to the companys near-term future than its Samuel Adams Light beer. Though a relative newcomer to the light beer wars, the company hopes to gain share through a more aggressive advertising campaign. Trying to steal share from industry leaders Budweiser and Miller wont be easy, but the company has a loyal following and, in this analysts opinion, a superior tasting product.
Starting from a smaller, more regional base also gives the company superior long-term growth prospects -- assuming management is up to the task. At present, Wall Street sees the company posting average annual earnings growth over the next five years of 12%, tops in the group. That growth is reflected in its forward price/earnings ratio of 25.7. However, the companys price/sales ratio of 1.3 is slightly below the industry average. Consequently, if the company can achieve even modest top-line growth of 4% to 5%, there should be room for modest multiple expansion. The stock is up 40% over the last year.
A compelling case for Coors
We now move to the value play in the group: Adolph Coors (RKY, news, msgs). Though a distant third among the megabrewers, Coors continues to make strides, especially in expanding its international sales. The Golden, Colo., company is also working to enhance margins, and theres plenty of work to be done on this front as its operating margin of 7.8% is well below that of the other major players. Its return on equity of 15.2% is also at the low end of the group scale. Not surprisingly, valuations reflect these discrepancies. Though the stock is up more than 45% in the last year, Coors still trades at a mere 14.3 times this years projected earnings of $5. Its price/sales ratio of 0.65 is also well below the industry average.
While Coors still has some hurdles to overcome before it earns the kind of valuations accorded Anheuser-Busch, its value advantage makes it a more compelling investment choice at this time -- especially if the company can gain any traction in the low-carb, low-calorie market with its new Aspen Edge brand. Relatively solid financials and a dividend yield of 1.14% only add to the attraction.
Skip the stock, buy the beers
Before closing, we should take a quick look at two small breweries -- Pyramid Breweries (PMID, news, msgs) and Redhook Ale Brewery (HOOK, news, msgs). Seattle-based Pyramids shares have lost 31% of their value over the past year, and the company is struggling to grow again. Earnings are somewhere in the future, if at all.
As for Redhook, headquartered Woodinville, Wash., its stock is depressed amid concern that a distribution deal with Anheuser-Busch might end prematurely. Once this cloud is lifted in a few days, the stock could enjoy a modest pop. However, you can now buy a share of its stock for $2.17, less than the price of a bottle of its beer, so the risks here are high -- way too high for most investors, especially since the stock isnt expected to turn a profit any time soon and that revenue growth is at the low-end of the industry.
So whatever beer you down while munching on chips and a burger this 4th of July, unless its produced by Coors or Boston Beer, simply enjoy the flavor and forget about buying the stock.
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