Submitted by
Wall St.
Daily
as part of our
contributors program
.
For a brief period in my life, I moonlighted as a beer-man at
Milwaukee's Miller Park.
Not for the money. And certainly not to watch the Brewers play.
(They stunk back in 2001.) But for the experience - and, of course,
the opportunity to perfect my very own "Beer Here" call.
Fast-forward a little more than a decade, and it might be time
for investors to start perfecting a beer call of their own.
Here's why…
Beer Me! Again
As I've noted in
Wall Street Daily
before
, when the economy hit the skids in 2008, beer drinkers traded down
from more costly bottles, turning to cans instead.
It turns out they also cut back on consumption. By the end of
last year, beer shipments were down to their lowest levels since
2003. So much for beer sales being recession proof.
The significance of the downturn really hits hard when you dig
into the annual numbers. Total beer shipments fell in 2009, 2010
and 2011 - by 0.7%, 1.3% and 1.7%, respectively. So the downturn
accelerated, even as the economy recovered.
Now, since three of anything in a row qualifies as a trend, has
slumping beer sales continued in 2012?
Nope. Much to the delight of beer makers, Americans are back to
soaking up the suds. According to the latest data from the Beer
Institute, shipments are up 1.9% through the first eight months of
this year.
Beer companies aren't the only ones rejoicing, though. Investors
are raising their glasses, too.
Brewing Up Profits
Ever the forward-looking machine, the stock market anticipated
the rebound in beer shipments. Early. Take a look:
Four out of the five-largest publicly traded beer stocks are
already up by double digits in 2012.
The world's largest brewer,
Anheuser-Busch InBev
(
BUD
), is up the most, rallying 45.5%.
In case you're wondering, that's almost triple the return of the
S&P 500 Index over the same period.
The chart does raise two obvious questions, however:
- What the heck happened to the one laggard,
Molson Coors Brewing Company
(
TAP
)? It's only up a scant 2.5% this year.
- More important, is it too late to profit from the rebound in
the other beer stocks?
As it turns out, the answers to both are linked.
Domestic or Import?
The main reason Molson's struggling is geography.
Prior to its June acquisition of Eastern Europe's StarBev,
almost 98% of the company's operating income came from North
America and the United Kingdom.
Although both markets are large, they're also fiercely
competitive and notoriously slow growing. Per capita beer
consumption in the U.K. is actually expected to decline by 2.4% per
year through 2016, based on Euromonitor data.
The end result? Molson holds the unenviable distinction of
having the slowest earnings growth rate over the last five years,
averaging just 4.47% annually.
Meanwhile, the majority of Molson's peers have been enjoying
double-digit earnings growth over the last five years. Why? Because
they all possess significantly more exposure to faster-growing
international markets.
For instance, 50% of Anheuser-Busch's operating income is
generated by developing markets like Mexico, China, Brazil and
Vietnam.
Heineken
(
HINKY
) derives more than 25% of its operating income from Africa and the
Middle East.
And
SABMiller Plc.
(OTC:
SBMRY
) gets 34% of its operating income from Latin America, and another
13% from Africa.
As we're all well aware, by no means is the growth party over in
these markets. By extension, neither is the profit potential for
beer stocks.
So which stock is an investor's best bet?
I'd focus on companies that are 1) expected to grow the fastest,
and 2) trading the cheapest.
The easiest way to measure both is to evaluate a company's
price/earnings to growth (
PEG
) ratio, a metric first popularized by investing legend, Peter
Lynch.
Ironically, the companies that have performed the best in 2012 -
Heineken and Anheuser-Busch - also have the highest expected growth
rates
and
most attractive valuations.
Bottom line: The beer industry's back in growth mode. Combined
with the recent performance of beer stocks, investors should be
considering joining the party, too.
