Thursday, November 10, 2011

Don't TAP BUD for Your Portfolio

Do people drink less beer during periods of slow economic growth so they can save money or do they drink more to drown their sorrows? The great thing about this question is that there are two publicly traded companies -- Anheuser-Busch InBev (BUD) and Molson Coors (TAP) -- whose earnings we can analyze to gain insight into this question. And here's another: should you invest in either company?

Beer is big business. According to First Research, there are 400 U.S. brewers with $20 billion in annual sales. And it's a highly concentrated market with eight companies controlling 90% of the sales. Among these Anheuser-Busch (Budweiser brands) and MillerCoors (Miller and Coors brands) are the biggest.

The concentration in the industry makes sense given its economics. After all, the costs of buying beer raw materials, brewing, distributing, and advertising are very high and therefore it is easy for a company that isn't gaining market share to fall further behind thanks to the high costs and seek to be acquired by consolidators like InBev.

But there is a parallel trend in the industry -- beer lovers who take advantage of cheap home brewing methods to start their own breweries. There are plenty of craft brewers, brewpubs, and microbreweries that bring the total to 1,753 establishments, according to the Brewers Association.

And craft brewing seems to be more popular than the overall industry. Craft brewer dollar sales rose 15% in the first half of 2011 -- whereas SABMiller expected 2.5% growth for the industry in 2011.

BUD appeared poised to grow faster than the industry when it announced results Wednesday. Analysts expected third quarter 2011 revenue to rise 7% to $9.98 billion; operating profit was forecast to be up 2.1% to $3 billion; net income was poised to climb 3.7% to $1.58 billion; and EPS was estimated to be $0.98 -- four cents higher than in 2010.

But BUD beat all the expectations when it reported Wednesday. Its revenues of $10.22 billion beat expectations by $240 million or 2.4%; its earnings of $1.59 billion were $10 million above expectations, and its EPS of $1.09 was a whopping 11 cents higher than expected.

The big negative in the quarter was that volumes sold in BUD's third quarter slipped 0.2% due to a 0.6% decline in beer and a 6.4% increase in non-beer beverages.

For its part, TAP has already reported declining results. On Nov. 2, it posted a 44% plunge in third quarter net income. Meanwhile, TAP's revenue fell 3% to $2.29 billion on a 4% volume decline to 17.2 million barrels.

The reason revenues did not fall as fast as volume was that some customers were willing to buy more high-priced brew. For example, according to the Associated Press, "higher priced seasonal craft brand extensions, like Blue Moon Summer Honey Wheat and Leinenkugel's Summer Shandy, were popular. But sales of Miller Lite and Miller Genuine Draft fell, as did sales of the company's lowest-priced beers following a price increase."

So here's what the investment choice between BUD and TAP boils down to:
  • Anheuser Busch: shrinking steadily, but high margins; expensive stock. BUD's sales have dropped 1.3% in the past 12 months to $37.8 billion while net income shrank 12.7% to $4.8 billion – yielding a wide 18.02% net profit margin. Its PEG of 2.16 (where a PEG of 1.0 is considered fairly priced) is expensive on a P/E of 22.48 and expected earnings growth of 10.4% to $4.15 in 2012.
  • Molson Coors: growing sales, but shrinking profits, good margins; expensive stock. TAP's sales have gone up 7.3% in the past 12 months to $3.4 billion while net income dropped 8.4% to $620 million – yielding a solid 17.95% net profit margin. Its PEG of 2.9 is very expensive on a P/E of 12.15 and expected earnings growth of 4.2% to $3.66 in 2012.
Both stocks look way too expensive to quaff for your portfolio. But if you want to follow consumer trends, drink craft beer.


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