As consumer interest in locally produced ale gets frothier — though there have been indications of a slowdown in the last few quarters — craft brewers have benefited. As of last year, craft breweries’ market share by volume of the overall beer industry stood at 11%, doubling since 2012. Meanwhile, growth in mass-market beers produced by “Big Beer” has flattened.
Craft breweries are smaller and more nimble, creating a more “innovative” product, some would say. Larger companies have strong brands and dominant footholds overall, but they’ve been searching for new ways to ignite sales growth.
Cue the craft breweries. Many have already gotten bought out in recent years. Bigger players can leverage their existing production capabilities, distribution networks and marketing teams to improve deficiencies once they absorb a small craft brand.
As craft breweries make strides, taking shelf space from existing legacy brands, this is a big threat for the bigger players. Brand equity is an important component within goodwill on their balance sheets, so if they can’t compete effectively moving forward, impairments could be a reality … an ugly one.
The general strategy here is to bet on the craft breweries and sell “Big Beer.”
Beer Stocks to Sell: Anheuser Busch Inbev (BUD)
Anheuser Busch Inbev NV (ADR) (NYSE:BUD) has recovered slightly after taking a beating in 2016. North America total volumes decreased 1.6%. EMEA volumes were down 1.2%. South America weighed heavily with a poor performance in a recessionary Brazil. As the company stated, Brazil performance was adversely affected by “the rising unemployment rate reaching its highest level since 1995.”
Efforts to compete in the craft segment, which BUD deems “high end,” have been less than inspiring. BUD continues its shopping spree to tack on growth and new lines inorganically.
In May, they added a bold southern player in Wicked Weed to their portfolio. Many craft beer aficionados were outraged, feeling that they sold out to “Big Beer.” Many customers posted public statements withdrawing support for the brand despite reassurances that quality will be maintained by the founders, who will stay on. Sometimes, becoming a part of an incumbent can do damage, though the extent is yet uncertain.
BUD’s strategy of vacuuming up craft breweries has not been executed in the most tactful way. The consumer ire is real, but the synergies and true value add to the larger organization is not clear. BUD needs to show the market that it can get growth back in positive territory beyond swooping in and buying some small breweries.
Beer Stocks to Sell: Boston Beer Company Inc (SAM)
The woes continue at Boston Beer Company Inc (NYSE:SAM). Its stock reflects that, now bouncing around the 52-week low mark.
First-quarter earnings were concerning, with 14% net revenue decline year-over-year due to a decline in shipments. Gross margins were under pressure as well, though management was upbeat about being able to hit its annual target of 51%-52%. Management is more optimistic than I am of being able to hit its full year gross margin target of between 51% and 52%. Based on Q1 numbers, they’ll need to squeeze out another 4%-5%, no easy feat.
Management doesn’t really seem to know where the business will end up either. Full-year 2017 earnings per diluted share was disclosed as $4.20 to $6.20. To state the obvious, that’s a gaping range as far as EPS estimates go.
They’re trying new things to reverse the pain, like reformulating IPA Rebel and pushing summer beers, but there’s no guarantee these are going to help the company regain market share. At a 19.6x price-to-earnings ratio, it’s still too expensive given that lack of clarity as to how it will be able to more effectively compete with edgier peers.
Beer Stocks to Sell: Constellation Brands, Inc. (NYSE:STZ)
Constellation Brands, Inc. (NYSE:STZ) has a well-stacked portfolio of brands both in beer and spirits. They have U.S. distribution rights to Corona and Modelo, which came out of the 2012 acquisition of Crown. Robert Mondavi and Svedka Vodka are theirs as well. And in 2015, they paid $1 billion for Ballast Point. So, there is good coverage across both beer and spirits.
Since 2012, the stock price has soared. Margins have expanded in large part due to 60% of cost of goods sold being in Mexico during a period when the U.S. dollar has appreciated significantly against it. STZ has benefited from this tailwind. After all, reporting sales in U.S. dollars and costs in a depreciating peso have made the numbers look good.
It has driven the stock to overvaluation territory. The currency split coupled with the unsustainable push for Corona and Modelo into the premium segment make this upward rise untenable.
Beer Stocks to Buy: Craft Brew Alliance (BREW)
Craft Brew Alliance Inc (NASDAQ:BREW) is a play that bets on an acquisition by Anheuser Busch within the next two years. It’s demonstrative of a special situations strategy, meaning that success (and profitability) is event-driven. Of course, stock price is still subject to the vagaries of the overall market, but this type of play is not dependent on an index breaking a support level, for instance.
Last August, Craft Brew Alliance and BUD signed agreements to accelerate BREW’s growth strategy, which behooves the much-larger BUD as it owns about a third of Craft Brew Alliance. It’s mighty similar to an arrangement that BUD had with Quinsa, which ended with an acquisition.
Both are strategic acquisition targets in the increasingly popular craft beer segment and both have operational agreements in place with BUD. Synergies will emerge as BREW partners with a bigger player that has scale in distribution and brewing. As the two companies work closely together, BUD will get a clearer sense of what BREW would add to its portfolio.
In fact, BUD probably already sees the significant potential, hence the deal. In particular, it no doubt has its eye on Kona. The signed agreement gives BUD international distribution rights in many market and BREW itself must invest in marketing efforts. BUD has been the exclusive mater distributor domestically since the 1990s, so there is a history of working together.
As Kona and BREW’s other brands continue to post additional quarters of strong performance (Q1 looked good), I can’t see why BUD wouldn’t bring them in-house.
Beer Stocks to Buy: Molson Coors (TAP)
Post-joint-venture, Molson Coors Brewing Co (NYSE:TAP) falls into “Big Beer,” but unlike many of its peers, it’s doing things right.
The combined entity did $11 billion in sales last year on 95 million hectolitres in worldwide brand volume. Management is focused on using the newly created scale to enhance supply chain capabilities, grow the top line and execute a cost savings plan that is estimated at $550 million by 2019, not including a few hundred million of tax benefits.
Add to that savvy M&A and here is a train I’m willing to board. Noting the strength in Mexican beer within the U.S. market, TAP signed a 10 year import agreement this month with Heineken N.V. (ADR) (OTCMKTS:HINKY) for the Sol brand able to use MillerCoors distribution network.
The deal and cost savings were overshadowed by weaker-than-expected EBITDA guidance. Shares were understandably down on the news. The market is not focused on the future enough. As merger kinks get worked out and craft/cider volume continues to outperform, investors just might see EBITDA margin increases beyond what management has indicated.
Beer Stocks to Buy: Brick Brewing (BIBLF)
BRICK BREWING COM NPV (OTCMKTS:BIBLF), being a Canadian brewery, also trades on the TSE under ticker “BRB.” At the moment, BIBLF is a small player at about a $100 million in market cap, but there is lots of runway for growth, which the company is running down at lightspeed.
Look at 2017 fiscal numbers: net revenues up from $37.6 million in the prior year to $45.2 million, EBITDA improved to $8.8 million, from $5.6 million in the prior year, and gross margins are up from 28% to 34.8%.
Q1 data reaffirms the continued strength of the business. Gross revenues posted a 44% gain quarter-over-quarter. Tremendous performance. Overall branded sales volume jumped to approximately 52,500 hectolitres vs. 44,700 last May. Again, tremendous.
Furthermore, new launches of LandShark and Margaritaville made major gain in volume as well, demonstrating traction in the Ontario market. Just let Brick Brewing keep doing what they’re doing and enjoy the ride. There is plenty of marketplace left to penetrate, and management has shown that its decisions are for the long-term benefit of BIBLF.
As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.