3 Beer Stocks to Tap

Temperatures and equity markets are ticking higher in tandem, which means it may be time for investors to cool down a little. And what better way to do that than grabbing a beer – or a beer stock? With current valuations significantly lower than their pre-pandemic highs, brewers represent sound allocation bests for opportunistic investors thirsty for value.

Alcoholic beverage stocks, including those of beer companies, fall into the consumer staples category, and are somewhat insulated against economic cycles - after all, beer is a low-cost treat that consumers continue to buy even at the worst of times. Indeed, despite the current weakness due to the coronavirus-related lockdowns, supply constraints, and travel restrictions, the beer industry enjoys relative immunity.

The global alcoholic beverage market, of which beer industry is the biggest constituent, is projected to grow more than tenfold, from $3 billion (£2.3 billion) in 2020 to $33 billion in 2027, or 3% annually.

We have looked at three high-quality businesses operate in a highly consolidated market, have entrenched positions, and benefit from the growth tailwind created by secular trends such as global increase in younger demographic:

Constellation Brands sells both beers and wines, it's the largest beer import company in the US, which means the company imports most products after manufacturing them abroad.

The company owns a portfolio of Mexican beer trademarks, including Corona and Modelo. Constellation is currently pruning its wine and spirits business by divesting several lower-margin assets, including several wine brands. It also owns 37% of cannabis producer Canopy Growth (WEED).

“While Constellation Brands historically made its bones as a winery and distillery, we now view the firm as one of the most stellar brewers across our global coverage,” says a Morningstar equity report. Moreover, the firm “continues to expand its addressable market by widening the gamut of categories in which it competes,” says Morningstar equity analyst Nicholas Johnson, who recently upped the stock’s fair value from $215 to $220, prompted by strong first-quarter results.

“The firm remains beleaguered by both micro and macro issues, but we remain sanguine on its ability to navigate the environment,” says Johnson, adding that shares have rebounded nicely from the egregiously cheap levels of early April.

Molson Coors is the fifth-largest beer producer globally, boasting top-two positioning in the US, Canada, and many Central European markets. Its popular brands include Blue Moon, Coors, Miller Lite, and Carling. Molson's legacy brands Coors and Miller Lite are the second and fourth best-selling beers in North America, while Carling is a leading brand in the UK. On a volume basis, the firm has robust market share in North America (24%), and holds fifth position globally with 4.5% share.

Despite a significant stable of intangible assets, though, the company doesn’t possess an economic moat. However, according to a Morningstar report, the company “wields some advantages over certain peers within the beer industry.” If Molson Coors had a moat, the report says, it would primarily stem from cost advantage.

As part of its revitalisation plan, the company is working to realign the business by focusing on “materially higher levels of manufacturing, innovation, and marketing investment across the portfolio, particularly in the above-premium segment where the firm has lagged,” says Johnson, who puts the stock’s fair value at $55.

Anheuser-Busch InBev, the world's largest brewer, owns five of the world’s top 10 beer brands including Beck’s and Budweiser.

Ranked among the top five consumer product companies globally, it boasts “one of the strongest cost advantages in our consumer defensive coverage and is among the most efficient operators,” says a Morningstar equity report. The company’s vast global scale and near-monopoly dominance in several Latin American and African markets afford significant fixed cost leverage and pricing power in procurement.

These attributes underpin the beer behemoth’s wide moat, its excess returns on invested capital, and best-in-class operating and cash cycles.

While not immune from the financial impact of the coronavirus pandemic, the company has had enough liquidity to manage through the current crisis. "We continue to like the business for the long-term,” says Morningstar sector director, Philip Gorham, who recently lowered the stock’s fair value from $108 to $96. Gorham projects a sharp 10% decline in sales this year, but forecasts sales to rebound 9.3% next year.

This article originally appeared on Morningstar Canada