As the days grow warmer and equity markets bubble over, some investors might be seeking a cooler retreat. What better place to find both refreshment and investment ideas than in your beverage coolers, stocked with not only your favourite brews but also a “hot tip” for your next big investment – beer stocks.
The S&P 500 and Nasdaq indices have reached record highs this year, clocking nearly 15% and over 20% gains, respectively, for the year to date, as of June 28. Investors searching for hidden gems amid a sea of overvalued equities might find beer stocks particularly refreshing.
The following brewers in the consumer staples sector have demonstrated consistent performance, even during market downdrafts. These high-quality names have captured leading positions in a highly consolidated marketplace and provide a reliable hedge against economic uncertainty.
Anheuser-Busch InBev BUD
Molson Coors Beverage Company TAP
Constellation Brands STZ
Anheuser-Busch InBev BUD
Analyst: Ioannis Pontikis, CFA
Makers of globally recognized Budweiser beer, Anheuser-Busch InBev is the largest brewer in the world. Its portfolio includes six of the world’s top ten beer brands by volume, according to Euromonitor, with 23 of its brands achieving retail sales exceeding US$1 billion each. The firm also owns a 62% stake in its Latin American subsidiary, Ambev.
AB InBev’s strategy involves acquiring brands with strong growth potential, expanding their distribution, and rigorously cutting operational costs. “Previous acquisitions have created a monster with vast global scale as well as regional density,” says a Morningstar equity report.
The beer behemoth enjoys one of the strongest cost advantages in Morningstar’s consumer defensive coverage and is among the most efficient operators. AB InBev’s significant fixed cost leverage and procurement pricing power are underpinned by a vast global scale and monopolistic positions in Latin America and Africa.
“This plays out in the firm’s excess returns on invested capital and best-in-class operating and cash cycles, asset turnover ratios, and working capital management,” claims Morningstar equity analyst director, Ioannis Pontikis, who puts the stock’s fair value at US$90.
The company has particularly attractive growth prospects in Latin America and Asia, which make up almost two-thirds of consolidated EBIT. “The consumer [in these markets] is trading up to premium global brands, and ABI holds a strong portfolio with Budweiser, Corona, and Stella Artois, all strong brands in the premium segment,” Pontikis points out.
Molson Coors Beverage Company TAP
Analyst: Dan Su, CFA
The Chicago-based Canadian-American multinational brewer, Molson Coors owns such popular brands as Miller, Coors, Blue Moon, and Carling. It ranks as the second-largest beer maker in both value and volume terms in the U.S., Canada, and the U.K. As its largest market, North America contributes over 80% of total revenue.
Under CEO Gavin Hattersley, Molson Coors has shifted its strategy to focus on premium beer expansion and reduce investments in the less profitable economy segment.
“We believe the new strategy steers the firm in the right direction,” says a Morningstar equity report. “We also applaud the technological enhancements being implemented throughout the supply chain, which should facilitate data-driven planning and better capacity utilization.”
Furthermore, the firm has been allocating substantially higher funds to modernizing brewing and distribution capacities as well as in research and marketing for high-end malt beverage offerings.
“These investments are partially funded by cost savings totalling US$600 million between 2020 and 2022,” notes Morningstar equity analyst director, Dan Su, who puts the stock’s fair value at US$70.
In the coming years, management plans to squeeze out more efficiencies by consolidating its sprawling brewing and packaging footprint to five major U.S. locations.
While Molson Coors has been aggressively pursuing premiumization, it faces “an uphill battle in the premium sphere against entrenched wide-moats Constellation and AB InBev which enjoy superior brand equity and distributor partnerships,” cautions Su.
Constellation Brands STZ
Analyst: Dan Su, CFA
The largest provider of alcoholic beverages across the beer, wine, and spirits categories in the U.S., Constellation Brands generates 80% of revenue from Mexican beer imports including top-selling Modelo and Corona brands. With its exclusive rights tied to the Mexican beer brands effective only in the U.S., the firm has small revenue exposure to international markets.
Constellation also has a 36% economic interest in Canadian medicinal and recreational cannabis producer Canopy Growth.
Th beer giant consolidated its dominant market position in the premium import segment by way of acquiring exclusive distribution rights for Mexican brands Modelo and Corona in the U.S.
“We give the brewer credit for a series of smart ad campaigns over the past decade, as well as strong quality control in its brewing operations, which have bolstered and reinforced the popularity and premium positioning of its two crown jewel brands,” says a Morningstar equity report.
While the overall U.S. beer market has been going sideways for years, Constellation has capitalized on premiumization trend to drive high-single-digit volume growth.
“We expect beer volume growth to remain strong for Constellation in the coming years, backed by consumer loyalty, the social currency associated with its premium brands, and a solid innovation pipeline,” asserts Su, who recently lifted the stock’s fair value from US$275 to US$280.
The brewer’s wide economic moat is built on a portfolio of top-selling Mexican beer brands that boast strong brand equity and tight distributor partnerships.
