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.
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 (NYSE: 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 (NYSE: 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 (OTC: 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.
Ahead of the tape,