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Beverage Stocks Worth Drinking To - 9348 views
BALTIMORE (Stockpickr) -- St. Patrick’s Day is right around the corner, a welcome excuse to throw a few back and break out your green wardrobe. But this year, St. Paddy’s is more than just that -- it’s also an excuse to take a look at one of the most fascinating industries on the market today: alcoholic beverage stocks.
If beverage stocks aren’t a part of your portfolio, they should be. By and large, these firms boast recession resistance, a sticky customer base, and an industry dividend yield that’s outpaced the S&P in growth in the trailing five years. With the market turning lower for the past two weeks, it’s time to think about adding staunch performers to your portfolio -- and alcoholic beverage stocks do just that.
While defensive plays normally lack when the market turns bullish, beverage stocks have also fared well against the S&P 500 in terms of absolute performance. In the last year, the industry’s average return has been 18%; that’s nearly twice the gains of the broad market.
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So don your plastic Leprechaun hat, and pour a tall one. It’s time to take a look at beverage stocks worth drinking to.
One of the largest brewers in the world, Molson Coors (TAP)) lays claim to some of the most well-known brands in the beer business, and major stakes in the Canadian, U.S. and UK markets. With an active, growth-minded management team and product offerings that run the gamut, Molson Coors should be poised for success in 2011. Even so, this stock is currently undervalued by a number of metrics.
Despite its size, Molson Coors is dwarfed by market leader Anheuser-Busch InBev (BUD), the brewer behind Budweiser. To counter that, Molson Coors teamed up with another of the “Big 3” U.S. brewers, SABMiller (SBMRY: Pink Sheets), to create MillerCoors, a joint venture that consolidates the two firms’ domestic distribution, marketing and cost savings efforts into a more-efficient firm. MillerCoors has already had a staggering effect on Molson Coors' profitability -- and should continue to make the firm more profitable as the operation matures.
One of Molson Coors' biggest challenges is the international nature of its operations. Because Canada and the UK contribute such a large chunk of sales, the effect of currency exchange rates can have a major impact on the GAAP numbers reported to investors. That’s particularly true in a post-recessionary environment that’s been strong for the dollar.
That said, it’s a problem that’s shared universally in this heavily consolidated industry -- perhaps even more so at competing firms. Ultimately, with Molson Coors trading at bargain prices right now, this stock should be worth owning in 2011.
One big bet on Molson Coors comes from The Children's Investment Fund, which counts the stock among its top holdings at 10.9% of the total portfolio as of the most-recent reporting period.
It’s difficult to say that Boston Beer (SAM) is on the other side of the spectrum. While still a craft brewer by the sales standards of the Big 3, the Sam Adams maker has ballooned into a consistent performer with a billion-dollar market cap and a share price approaching triple digits. Still, exceptional growth in the craft category should fuel excess returns for SAM.
The sales tailwinds in the craft brewing category are hard to miss. While most industries saw consumers trade down to less expensive options in 2008 and 2009, craft beer actually saw double-digit sales growth as consumers traded up to more-expensive brands.
Of the group, Boston Beer is certainly the standard bearer. It’s by far the largest craft brewer -- and one of the few to boast a nationwide footprint. Innovation is the name of the game for SAM; by developing new, unique beverages, this firm caters directly to a fast-growing group of beer connoisseurs in the U.S.
Financially, this firm is equally impressive. While growth certainly comes at a cost for SAM -- shares aren’t trading at the same bargain rate that’s seen in Molson Coors, for instance -- the company does boast deep margins, strong cash flow generation, and a debt-free balance sheet.
For fans of the stronger stuff, Diageo (DEO) is an attractive play. The spirit maker owns some of the most popular brands out there, including Smirnoff, Captain Morgan, Jose Cuervo and Johnnie Walker. The company also has exposure to beer through its vaunted Guinness brand.
It’s not just the fact that Diageo lays claim to nearly half of the industry’s 20 top-selling brands that makes the firm attractive right now. Diageo is also home to one of the best distribution networks in the industry, reaching 180 countries. That network should be pivotal in the company’s growth plans for the future. As burgeoning middle class populations in emerging market nations start to delve into luxury brands, spirit makers are likely to see a major driver of sales overseas.
Like Molson Coors, Diageo is a mature firm with strong margins and a respectable 3.35% dividend yield. With consumers largely unwilling to switch from their preferred brands (many of which fly under the DEO flag), expect this stock to be a perennial performer.
To see the rest of our beverage stock list, check out the Alcoholic Beverage Stock portfolio on Stockpickr.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.