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Is BUD still the king of beer stocks?
Sure, Anheuser-Busch has the muscle to create, market and distribute. But others are better positioned as tastes go increasingly upscale.
By Michael Brush
As sports fans settle in with refreshments to track which teams will dominate the baseball playoffs and football season this autumn, investors will be watching the drinking habits of those fans to get a read on another great contest.
That would be the battle pitting the titan of the mainstream domestic beer market -- Budweiser -- against more refined libations, from flavored vodka and upscale wines to pricier beers like Corona and craft brews like Samuel Adams.
After all, its no secret that our love affair with plain old mainstream brews is on the wane -- and no ones quite sure how far the trend will go.
For example, Anheuser-Busch (BUD, news, msgs), the producer of popular brands like Budweiser, Bud Lite and Michelob, recently warned that sales volume for the third quarter is running about 1.2% below a year ago. That has sparked a round of cautionary notes from sell-side analysts. Beer sales overall were weak once again in July and August, and competitors such as Adolph Coors (RKY, news, msgs) are having the same problem.
Whats going on here?
A four-pack of trends
Analysts cite four trends chipping away at the popularity of mainstream suds.
Twentysomethings are turning away from mainstream brews like Budweiser. Years ago, it was pretty much a given that your early days of drinking would involve lots of basic brews -- a six-pack during the game or a keg at a college dorm party. Today, the twentysomething crowd is just as likely to reach for a mixed drink, a nice wine or an upscale specialty brew. Alcohol-sector experts dont believe this trend has anything to do with the Atkins Diet craze, which leads dieters away from food and drink loaded with carbohydrates and sugar. And they dont see the trend reversing anytime soon, either.
I dont think it's Atkins, because mixed drinks have a lot of sugar. People are not drinking vodka neat, says Jim Koch. As chairman of Boston Beer Co. (SAM, news, msgs), Koch follows alcohol consumption trends closely. Boston Beer produces a line of upscale craft beers under the Samuel Adams brand. When people are out drinking, they are not really concerned about the calories or the carbs.
Instead, the younger crowd is practicing what Constellation Brands (STZ, news, msgs) Chief Executive Richard Sands calls aspirational drinking. They are moving away from drinking one alcoholic beverage, or popular priced domestic beer, to drinking a multitude of products that fit their lifestyle, occasion and mood. They are a lot more fluid and flexible. Personally, I think this is going to continue for a long time.
Spirits are haunting Budweiser. Another problem for mainstream brewers such as Anheuser-Busch is that baby boomers typically opt for spirits over beer as they age. Analysts cite several other reasons for the growing popularity of spirits. First, brands like Grey Goose vodka, Jack Daniels or Smirnoff are getting more promotion during televised sports events, during cable TV programs and at bars. Spirits producers have also done a better job of coming out with innovative products such as flavored vodka. Banc of America Securities analyst Bryan Spillane also cites the emphasis in hip-hop music on premium liquor brands over beer. Given these factors, its no surprise beer shipments are up only about 1% this year compared with growth in spirits shipments of around 4%, according to A.G. Edwards.
Premium beers and imports are hanging tough. While Bud sales volumes languish, consumers didnt even blink when Constellation hiked the price of Corona beer last January. Koch reports that Boston Beer has been able to carry out price hikes, too. The microbrew sector is still very, very strong, agrees Paul Shipman, chief executive of Redhook Ale Brewery (HOOK, news, msgs). As people experiment with the alcohol consumption, the micro-brewery provides a highly flavorful alternative.
Miller is a tough Bud competitor once again. Things are getting harder for Budweiser inside the mainstream beer market, too. Under the leadership of Chief Executive Norman Adami, Miller brewer SABMiller is churning out creative ad campaigns that are grabbing more of the market.
Will Anheuser-Busch shares stay flat?
All these obstacles mean Anheuser-Busch share gains will come slower, says Deutsche Bank analyst Marc Greenberg, and growth in its beer sales will be more linked to sluggish growth in the category overall.
So its no surprise that shares of Anheuser-Busch have been trapped in a trading range between $50 and $54 for the past year.
But is the stock a short because of all the problems brewing in the alcohol sector? Maybe not. A lot depends on how well the world's largest brewer lives up to the challenge of bringing out new products, and how much it will have to spend to promote them.
So far, the company has done a decent job of cooking up new offerings. In recent years, Anheuser-Busch has had success with a line of Bacardi liquor-branded flavored malt beverages, known as malternatives. Its also had a hit with a premium low-carb beer called Michelob Ultra and with a recent freshness campaign, which guarantees delivery of its beer to certain bars the same day the beer is made.
Earlier this month, Anheuser-Busch unveiled a new concoction called B-to-the-E, a fruity-smelling beer spiked with caffeine, ginseng and guarana, an herb containing caffeine thats used in a popular Brazilian soft drink. (The E stands for extra.) The new drink should debut in November.
Industry insiders acknowledge these kinds of moves affirm the marketing wizardry at Anheuser-Busch. Together with its distribution muscle, that suggests it would be unwise to count the company out. I have a lot of confidence that Anheuser-Busch will address the changing consumer, says Constellation Brands Sands. They are recognizing that their base business is a bit stagnant and they have to surround themselves with a greater breadth of product.
Besides, the stock now looks cheap. It trades at about 17.6 times forward earnings estimates of $2.88 per share, or toward the lower end of its historical trading range of 17 to 23 times forward earnings. In short, investors may already be pricing in a lot of the risk, says Banc of Americas Spillane.
Heres a quick look at three other players in this space.
Constellation Brands
As a producer and distributor of popular liquors, wines and beers, Constellation Brands offers investors a diversified play on alcoholic beverages. The company recently beat estimates, thanks in part to impressive high single-digit growth for Corona beer, despite a price hike earlier this year.
Constellation Brands has solid cash flow, which supports its long-term strategy of growing by purchasing other distributors and producers. Trading for around 14 times forward earnings, Constellation Brands goes for well below the group average of 17.5 times forward earnings. With forecast medium-term earnings growth of about 14%, the stock has a price-earnings to growth ratio of about 1, well below levels of 1.5 on many other stocks in the group.
Boston Beer
While Samuel Adams should continue to benefit from its status as a well-recognized premium beer, Boston Beer stock may be fully valued at $25, say some analysts. So it might be better to buy it on dips.
Deutsche Banks Greenberg, for example, thinks further market share gains will only come with much greater spending on marketing and distribution, and that could cut into margins. On the other hand, he thinks Boston Beer would fit nicely inside the portfolio of a larger brewer, and so a buyout might be in the air, perhaps in the $28 range.
That said, both these theories were circulating when we featured Boston Beer as a promising new luxury stock last December. Yet the stock has risen 38% since then, and theres still no news on a takeover.
Redhook Ale Brewery
This tiny Woodinville, Wash., microbrewery has no analyst coverage and it takes a pretty laid-back approach to investor relations. Chief Executive Shipman, for example, politely declines to offer any guidance whatsoever on the outlook for business. But partly because it is overlooked for now, this little brewer may offer some of the best potential gains in the beer and alcohol sector over the next year or two.
For one thing, the stock is dirt-cheap. At $3.10 per share, it trades well below book value of $8 per share, says Robert Robotti, a value investor with Robotti & Co. Advisors in New York, which holds a position. Robotti says the companys balance sheet recently improved when Anheuser-Busch agreed to convert debt-like preferred stock into common stock. In early July, Redhook stock jumped when the company renewed a long-term distribution agreement with Anheuser-Busch, known for its distribution muscle.
Another positive for Redhook: Smaller players in the microbrew space are dropping out, which opens up more room. Many players who operate on single-city or single-state basis are having a hard time staying in the game, says Shipman. We are beginning to see an attrition of weaker players, and we expect that to be favorable for us.
Finally, Redhook recently hired Craft Brands Alliance, in Portland, Ore., to carry out marketing. This could be a plus because Craft Brands already does marketing for two popular microbrews, Widmer Brothers Brewing in Portland, Ore., and Kona Brewing in Kona, Hawaii. With three solid names under its belt, Craft Brands Alliance should be able to do an effective job of promoting all three brands inside chains like Applebee's International (APPB, news, msgs). Redhook is a very solid brand, and given the right kind of sales and marketing efforts there is a ton of potential, says Tim McFall, vice president of marketing for Craft Brands.
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