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It’s early October, and with October comes Oktoberfest and the pleasure of beer drinking.  Beer stocks have posted varied returns over the past year, but there have been some outsized gains.  Boston Beer (SAM - Snapshot Report) has been the hottest and had rallied just over 118% at writing.  Craft Brew Alliance (BREW - Snapshot Report) was up about 71%, while Carlsberg and SABMiller (SBMRY) lagged recording gains of 4.6% and 5.9% respectively.  By comparison, the S&P 500 ETF (SPY - ETF report) had posted a gain of 16.7%.

Given the Oktoberfest season and some powerful investment returns in the brewing industry, it might be time to look at which brewer is the best investment.  I’ll leave the award for the best tasting beer to you.

Looking at earnings:

The table below displays a list of major brewers.  Brewing is a global industry so there is a universe of international names.  The table displays the change in EPS estimates over the past thirty days for this fiscal year and next, expected earnings per share growth for the coming year, and the Zacks Rank. 

A Zacks Rank of # 1 is a Strong Buy and indicative of a company seeing sharp upward momentum to earnings per share estimates.  A Zacks Rank #3 is a Hold, while a Zacks Rank #5 is a Strong Sell and consistent with a company seeing material downward revisions to its earnings per share estimates. Most of the names are Zacks Rank #3.

As indicated by the Zacks Rank #1, SAM has seen the largest upward revision to earnings over the past thirty days.  Anheuser Bush (BUD - Snapshot Report) was the only other name to see earnings estimates revised higher.  No names have seen EPS estimate cut and the remaining companies have seen steady analyst activity on earnings.  As a result, SAM and BUD seem to have the most favorable momentum in earnings expectations.

One surprising aspect of the table is the outlook for earnings per share growth. Despite its size, BUD is expected to post the second largest sales growth of the group at 16.8%.  The earnings growth at SAM is less dynamic at 14.7%, while BREW has the quickest earnings growth by a long shot at nearly 70%. Its small size and the strong niche of craft beers are probably fueling the growth. There are markets to penetrate and a recovery in earnings is expected to take place after high operating expenses in 2012.

Sales growth, gross margin, and dividend yield:

The next table highlights sales growth, gross margin, and dividend yields for the group. In another surprise, BUD is expected to show the fastest revenue growth in the coming fiscal year.  It is growing slightly faster than SAM and well above its large cap competitors.  BREW had the third highest sales growth estimate.

Gross margin is a bit hard to analyze in a table, but BUD stands out again as showing strength.  Its recent gross margin at 58.5% was above the 10 year median.  Its gross margin looks firm relative to SAM and TAP both outright and relative to trend.   BREW has seen its gross margin ease back in recent quarters, but the overall level is high compared to recent years.  The reporting on SBMRY may make it difficult to compare its gross margin with the group.

On the dividend front, Molson Coors (TAP - Analyst Report) pays the highest dividend followed by BUD.  SAM and BREW do not pay dividends, but are smaller companies and focused on growth. Based the combination of sales growth, gross margin, and dividend, BUD seems to be the most attractive name.

Valuation:

The table below highlights three measures of valuation – the PEG ratio, the 12 month forward PE ratio, and the price to sales ratio.   CABGY has the lowest PEG ratio and looks most reasonably priced based on this metric.  SMBRY and BUD follow, while Heineken (HEINY) and BREW look most expensive. Generally, the trade is paying a premium for earnings in the sector.  Notice that the median PEG ratio is over 2.00 and the median 12 month forward PE ratio is 18.4.

On a 12 month forward earnings basis, TAP and CABGY are most cheaply priced and trading well below the average and median of the group.  BREW and SAM are by far the most expensive.

Looking at the price to sales ratio, CABGY and BREW looks the most inexpensive followed closely by HEINY.  SAM and BUD are most expensive.

If each brewer is assigned a number for its position in each valuation measure and the numbers are averaged, CABGY (1.33) and TAP (3.00) are the least expensive followed by SBMRY (3.67).  SAM (6.00) was the most expensive followed by BREW (5.00) and BUD (4.67).  A value of one was assigned to the company with the most inexpensive valuation and a value of seven was assigned to the company with the most expensive valuation. 

The market seems to be paying up for growth.  Loosely, the companies that have the highest valuations have the largest EPS growth rates.  

Conclusions:

When trying to come up with the best beer investment, it feels like I’m in a beer tasting contest where the contestants’ sport both positive and negative attributes and it is difficult to call a winner. Depending on your style and mood, the results can differ. There is no silver bullet.  Given the mix of earnings growth and valuation, drinking beer may be more pleasurable than investing in beer, but here are some final thoughts:

Value hunters may be most attracted to CABGY.  The stock had the lowest valuation measures based on PEG ratios, 12 month forward PE ratios, and price to sales ratios.  Earnings growth is expected to be respectable in the coming year at 12.4%, but sales growth is slow and expected to rise just 3.82%.  The value may be linked to the outlook for slow sales growth.  A recovery in the European economy could be a surprise benefit given the focus of operations.

Momentum players will be attracted to SAM given its strong upward revision to earnings estimates, solid growth outlook and strong stock price, but valuation is stretched.  The valuation would keep my portfolio from drinking this name.   SAM is a stock which could look tasty after a correction.

BUD stands out as attractive when mixing the value and growth picture together.  Although it is a Zacks Rank 3 (Hold) it has seen its earnings estimate revisions move higher and it possesses a solid outlook for sales and earnings growth.  Stability in gross margin and its dividend are added positives.  The downside rests in BUD’s valuation. It is not cheap, which keeps it from being clearly crowned the king of beers from an investment perspective.   

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