Are beer stocks too frothy?

By Alanna Petroff
Globe Investor Magazine Online, June 30, 2008

Some investors are finding a way to take the edge off all this recession talk: buying global beer stocks.

Brewers have a reputation for being recession-proof. Beer lovers tend to keep buying in bad times, ensuring brewers make steady profits.

But recent talk of consolidation has pushed some beer stocks to record highs, which raises the question: Is now the time to buy beer stocks, or is the industry too frothy?

Smart investors know beer is not a get-rich quick industry. Beer consumption in the mature North American and European markets is stagnant at best. This means cost cutting and global expansion are keys to increasing profits in the industry.

Beer market snapshot:

• Most analysts expect no more than 1-per-cent growth in U.S. and Canadian beer volumes over the next few years.



• Beer fell to 55 per cent of U.S. total alcohol consumption in 2006, down from 60 per cent in 1994, according to Beer Marketer's Insights.



• Beer fell to 47 per cent of total alcohol sales in 2007, down from 52 per cent 10 years earlier, Statistics Canada says.



• The Russian beer market has nearly doubled in size over the past five years.



• China had 15-per-cent growth in 2006, its third year of double-digit growth.

So which global brewers are good investments? Here's a look.

InBev
Brands: Stella Artois, Brahma, Beck's, Labatt Blue.
12-month stock performance: down 21 per cent.

Despite downward pressure on the share price because of its $46-billion (U.S.) bid for Anheuser-Busch, this company understands that bigger really is better. And if the buyout goes through, Paul Harris of Avenue Investment Management says the company will be able to cut costs more aggressively to return value to shareholders. The portfolio manager says he is happy owning InBev in one of his global funds because the company has a solid reputation for managing takeovers. Rick Wolfe, president of the management consultant firm PostStone, says InBev is his favourite beer company because of its focus on expanding into emerging markets.

Anheuser-Busch
Brands: Budweiser, Bud Light, Michelob
12-month stock performance: Up 23 per cent

Anheuser-Busch shares have rallied more than 17 per cent since InBev takeover rumours began swirling, but investing in this stock is tricky. As Mr. Wolfe puts it, "Anheuser can't seem to put an upward trend together in its stock." Current stock levels have more to do with takeover talks than with the fundamentals, he says. So if you plan on investing in Anheuser, analyst Jack Russo of Edward Jones warns the sword cuts both ways. An "upside [is] possible if InBev raises its offer above the current $65 level," he writes in a research note.

SABMiller
Brands: Miller, Peroni, Pilsner Urquell
12-month stock performance: Down 9 per cent.

SABMiller and Molson Coors are combining their U.S. operations, and within three years, anticipate yearly cost savings from the deal will reach $500-million. But analyst Brian Yarbrough from Edward Jones warns there could be some "hiccups" and investors shouldn't get too excited. Expect at least a few problems to pop up as the companies combine distribution systems, he says. But forget about the U.S. market for a minute. British analyst Sam Hart from Charles Stanley & Co. says the most compelling story here is the emerging markets. SAB gets more than 60 per cent of its earnings from such markets as Africa, Asia and Latin America. Mr. Hart expects beer sales in these countries will help the company deliver steady earnings growth over the next few years.

Molson Coors
Brands: Coors Light, Molson Canadian
12-month stock performance: up 21 per cent.

Molson Coors is the other side of the Miller-Coors venture, and it hopes to share in the same cost-cutting benefits as SAB. Molson's stock has been strong this year and it is now selling at a premium to its normal price of 14 times earnings because of the MillerCoors news, Mr. Yarbrough says. But don't let that scare you. "They have the best growth prospects they've ever had. They have a lot of momentum with their Coors Light brand," says Yarbrough. But Molson Coors operates almost entirely in mature markets - the U.S., Britain and Canada, where beer sales are generally flat. A smoking ban in British pubs has also contributed to slower sales.

Special to The Globe and Mail