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As the holidays approach, many people’s thoughts turn to beer, and for investors that tendency has probably been reinforced and maybe even exaggerated recently as they look at the balances of their accounts these last few days.
However, this may not necessarily be for the reason you might think. The volatility we have seen over the last few months is probably enough to drive some to drink, sure, but the beverage industry is also generally considered to be a safe place to hide when the market is falling.
The theory is that beer is pretty much recession-proof. When things get tough, consumers give up on a lot of things, but beer usually isn’t one of them.
The problem right now is that the industry has its own, internal woes. It is one where economies of scale are obvious, not just in terms of production but also, and maybe more importantly, distribution. That has led to some serious consolidation, but even that has reached the point where it brings its own issues.
The biggest beer company in the world, Anheuser-Busch InBev (BUD), for example, announced in October that they were cutting their dividend in half to focus on paying down their large debt load. That pile of debt was partly due to their acquisition of rival SAB Miller in 2016, a merger between the world’s two largest beer companies.
The dividend cut came as BUD announced another disappointing quarter of sales, and the stock dropped ten percent on the news. Often, a reaction like that to news like that creates an excellent opportunity for investors. Paying down debt may hurt short-term profit, and therefore the stock price, but doing it before a downturn leaves the company better positioned to survive and even thrive when things get tough. This case, however, is an exception.
As you can see from the 2-year chart above though, the drop in BUD that followed the dividend cut was just a continuation of a long-term decline. Some of the reasons for that are out of the company’s control, such as the impact of a higher dollar and global trends in beer that have seen overall consumption begin to decline and a move away from the mass-produced product.
Some, though, are not.
The massive acquisition of a rival the year before a downturn can be seen as unfortunate, or as simply a bad decision. Either way, it has left BUD with that huge pile of debt at a time when servicing it is becoming more difficult. In that context, debt reduction looks less like a prudent decision than a necessity. The response of Anheuser Busch InBev, and of other big brewing companies for that matter, to the rise of craft beer in major markets also looks to be questionable.
Buying out successful small, independent brewers may have made the problem go away in the short-term but it failed to recognize something important. Macro breweries are accustomed to dealing with loyal customers, and so creating and maintaining a brand is important. I doubt that most consumers could tell the difference between the major brands in a blind tasting, but a Bud Light drinker is hardly ever going to order a Coors Light.
Craft beers are different.
After leaving the market, I owned and ran a wine and craft beers store for several years, so I have some personal experience here, and I can assure you that while beer snobs are fickle by nature anyway, nothing kills their appetite for a beer like association with the despised macros. What the big boys were doing when they paid up for independent and regional brands was buying them to make them go away. The problem is that in this case, it looks like that was unintentional.
Anheuser Busch InBev stock looks in many ways like something that would appeal to a contrarian like me. It has fallen a long way and took another big hit recently for what appeared to be taking a responsible, long-term view. The drop, though, has not made the stock cheap in absolute terms, and certainly not in context. The P/E of around 21 is nothing to write home about, and the price decline has not been caused by irrational fear or just the stock falling out of favor with investors for no reason.
It is the result of structural issues in the industry and a combination of bad luck, bad timing, and bad decisions. So, even after a 43% drop in just over a year, this BUD’s not for me.