With the recovery in the economy, the Zacks
Beverages – Alcohol industry has braced up to benefit from e-commerce growth, and the boom in non-alcoholic spirits and ready-to-drink (RTD) cocktails. Investments in product innovations and the fast-growing RTD category bode well for players like Anheuser-Busch InBev ( BUD Quick Quote BUD - Free Report) , Diageo Plc ( DEO Quick Quote DEO - Free Report) , Constellation Brands Inc. ( STZ Quick Quote STZ - Free Report) , The Boston Beer Company Inc. ( SAM Quick Quote SAM - Free Report) and Molson Coors Beverage Company ( TAP Quick Quote TAP - Free Report) . Even as the restrictions are lifted, a pronounced recovery in the on-premise and Travel Retail channels are likely to be slow-paced. Also, escalated input and packaging costs along with higher advertising expenses may continue to be headwinds. About the Industry
The Zacks Beverages – Alcohol industry mainly comprise producers, importers, exporters, marketers and sellers of alcoholic beverages like beer, craft beer, ciders, wine, rum, whiskey, liqueurs, vodka, tequila, champagnes, brandy, amaretto, ready-to-drink (RTD) cocktails and malt. However, some industry players also produce and sell non-alcoholic beverages like carbonated soft drinks, sparkling waters, bottled water, energy drinks, powdered and natural juices, and RTD teas. The companies sell products through wholesalers, and retailers like supermarkets, warehouse clubs, grocery stores, convenience stores, package stores, drug stores and other retail outlets. These also sell beer directly to consumers in cans and bottles at restaurants, pubs, bars and liquor stores. Some brewers operate brewpubs or taste rooms at breweries, offering consumers the freshest beer.
What's Shaping the Future of Beverages - Alcohol Industry
A major shift in sales trends to off-premise (stores) and e-commerce amid the pandemic has kept the spirits of alcohol companies high. While the pandemic left the on-premise channel out of business, alcohol sales saw record growth in 2020 and the trend is continuing to this year. A lot of the credit for the robust show goes to e-commerce growth and efforts by industry players to adapt to the change. Also, the launch of several e-commerce sites dedicated to selling alcohol drove online sales. Additionally, quickly shifting focus and resources to off-premise, including retail stores and other channels, have been beneficial for the industry players due to the increased habit of stocking spirits for drinking at home. A recent Drinks Market Analysis report by the International Wines and Spirits Record (“IWSR”) revealed that 2020 was one of the best years for the spirit industry. Also, IWSR pointed out that online alcohol sales rose by a whopping 45% globally to $29 billion in 2020 compared with only 1% growth witnessed in 2019. Notably, the United States contributed the majority of growth, with online alcohol sales soaring 80% to $5.5 billion. Shift in Trends to Off-Premise & E-commerce: Moreover, the IWSR predicts the robust online alcohol sales trends to continue in 2021, as consumers continue to enjoy the comfort of online purchases and at-home drinking. The IWSR forecasts the global drinks industry to witness 2.9% growth in volume by the end of 2021. It predicts the global beverage alcohol consumption to return to the pre-COVID levels by 2023, followed by steady growth through 2025. Another trend, which has gained prominence amid the pandemic, is the demand for non-alcoholic, RTD cocktails and premiumized drinks. Notably, RTDs have been the fastest-growing category, given the increased demand for low- or no-alcohol drinks due to health consciousness. The desire for the consumption of refreshing, flavorful and premixed bar-like cocktails at home, as restaurants and bars remained closed, primarily drove the RTD category’s growth. Also, vibrant and creative packaging has been an added incentive, particularly for millennials. The factors have led RTDs to become preferred alternatives for traditional alcoholic drinks, particularly pulling out a considerable market share from the beer category. In 2020, growth for canned cocktails was particularly fueled by the rising popularity of Hard Seltzers. Additionally, ready-to-drink vodka sodas, gins and tonics gained prominence among consumers looking for a stronger taste with more alcoholic drinks. Like Hard Seltzers, canned cocktails appealed to consumers looking for alcoholic drinks based on convenience and taste. Backed by the increasing consumer appeal for flavors, the RTD category in the United States recorded growth of 62.3% in 2020, according to IWSR. This growth was also led by the Hard Seltzers sub-category, which surged 130%. Non-Alcoholic Drinks and RTDs to Drive Growth: Notably, the RTD category is expected to become the second-largest beverage alcohol category in the United States, in terms of volume consumption. The category has already outpaced the spirits volume and is likely to surpass wine by the end of 2021. According to the IWSR projections, no-alcohol spirits and RTDs are likely to be the two fastest-growing categories, which are also expected to witness a compound annual growth rate of 30.6% and 10.2%, respectively, between 2021 and 2025. The closure of the on-premise channel, including restaurants, bars and cinemas, has largely taken a toll on the top lines of alcohol companies in 2020. Moreover, the Travel Retail business continued to be the most significantly impacted, as international airline travel declined and the cruise industry remained nearly shut down. While the reopening of the on-premise channel and pick-up in tourism are likely to aid alcohol sales, the trends are likely to remain slow-paced and uneven across various markets for the next several months. On-Premise & Travel Retail Headwinds Continue: Escalated input costs and higher packaging costs have been major concerns for the industry. These along with higher advertising and promotional expenses as well as increased SG&A costs have been weighing on margins. For example, Higher Costs: Brown-Forman Corporation ( BF.B Quick Quote BF.B - Free Report) made increased advertising investments in the second half of fiscal 2021 for the Jack Daniel’s “Make It Count” campaign, which led to operating expense deleverage in fiscal 2021. Notably, companies are witnessing lower fixed cost absorption and unfavorable impacts from the portfolio and channel mix shifts, which are hurting the gross margin. Zacks Industry Rank Indicates Bleak Prospects
The Zacks Beverages – Alcohol industry is a 15-stock group within the broader Zacks
Consumer Staples sector. The industry currently carries a Zacks Industry Rank #132. This rank places it at the bottom 48% of more than 250 Zacks industries. The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dull near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1. The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. In the past six months, the industry’s earnings estimates for the current year have declined 1.2%. Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture. Industry Lags S&P 500
The Zacks Beverages – Alcohol industry has underperformed the S&P 500 but outperformed its sector in the past year.
While the stocks in the industry have collectively gained 28.9%, the Zacks S&P 500 composite has rallied 39% and the Zacks Consumer Staples sector has grown 20.1%. One-Year Price Performance
Beverages - Alcohol Industry's Valuation
On the basis of forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing Consumer Staples stocks, the industry is currently trading at 27.67X compared with the S&P 500’s 22.1X and the sector’s 20.43X.
Over the last five years, the industry traded as high as 28.84X, as low as 18.78X and at the median of 23.74X, as the chart below shows. Price-to-Earnings Ratio (Past 5 Years)
5 Alcohol Beverages Stocks to Keep a Close Eye on
None of the stocks in the Zacks Beverages – Alcohol space currently sports Zacks Rank #1 (Strong Buy) and Zacks Rank #2 (Buy). However, we have highlighted five Zacks Rank #3 (Hold) stocks to watch from the same industry.
Let’s have a look at the companies. Anheuser-Busch InBev: The global brewing company, with more than 500 iconic brands, has been benefiting from its unique commercial strategy, strong brand portfolio and investments in operation excellence. This has been aiding market share growth across the majority of the key markets. Also, the expansion of the Beyond Beer portfolio along with investments in B2B platforms, e-commerce and digital marketing bodes well. The company is steadfastly growing its Beyond Beer portfolio, including products like RTD beverages like Canned Wine and Canned Cocktails, Hard Seltzers, Cider, and Flavored Malt Beverages. The Beyond Beer trend has been recently gaining popularity due to the rise in demand for low-alcoholic or non-alcoholic drinks. Further, it is on track with its premiumization strategy focused on growing the premium and super-premium brand portfolio. The Leuven, Belgium-based company’s leading position in the majority of its markets and a strong global footprint lend the advantage of economies of scale and growing its multi-country brands globally. The Zacks Consensus Estimate for the company’s 2021 sales and earnings suggests growth of 14.4% and 64.9%, respectively, from the year-ago period’s reported figures. The consensus mark for 2021 earnings has moved up 1% in the past 30 days. The stock has risen 34.2% in the past year. Price and Consensus: BUD Diageo Plc: The largest alcoholic beverage company, based in London, has been benefiting from the efforts to quickly respond to increased off-trade channel demand and changes in consumer occasions as well as investments in opportunities. Also, strong consumer demand, market share growth in the spirits category and positive category mix have been aiding sales in North America. Moreover, the company is poised to gain a share in the fast-growing RTD category through its recent launches, including the Crown Royal RTD canned cocktail line, Ketel One Botanical vodka spritz and Tanqueray crafted gin drinks. Additionally, it is well-placed with its Smirnoff seltzers in the Hard Seltzer category. As part of its recent investments in the RTD category, the company announced plans to expand its manufacturing capability by installing two can lines at a new facility in Plainfield, IL. The facility, which will be worth roughly $80 million, comes with the capacity to produce more than 25 million cans of RTDs and will be ready for commercial production by the summer of 2021. The company has rallied 37.2% in the past year. The Zacks Consensus Estimate for the company’s 2021 sales and earnings suggests growth of 26.7% and 27.8%, respectively, from the year-ago period’s reported figures. The consensus estimate for current-year earnings has moved south by 4.1% in the past 30 days. Price and Consensus: DEO Constellation Brands Inc: The consensus estimate for fiscal 2022 earnings per share (EPS) for the Victor, NY-based company, which is the third-largest beer company and a leading, high-end wine company in the United States, has moved up 0.5% in the past seven days. Constellation Brands’ constant focus on brand building and initiatives to include new products bode well. It is anticipated to have benefited from growth in the hard seltzer category through its recently launched Corona hard seltzer. The company is poised to benefit from continued strength in the Modelo and Corona Brand Family as well as growth in the Power Brands. Also, it has been benefiting from consumers’ shift to e-commerce for buying alcoholic beverages. The digital business has been gaining share through platforms like Instacart, Drizly and other retailer online sites as consumers look for the convenience offered by the channels, which is likely to continue. The Zacks Consensus Estimate for the company’s fiscal 2021 earnings suggests growth of 0.8% from the year-ago period’s reported figure. The stock has gained 25% in the past year. Price and Consensus: STZ Boston Beer: Based in Boston, MA, Boston Beer is the largest premium craft brewer in the United States and commands a strong portfolio of globally recognized brands. The company’s innovation in the non-beer categories, including hard teas, ciders and seltzer, has been a hit among liquor drinkers, which should continue to drive growth. Its Truly Hard Seltzer and Twisted Tea brands have been key growth drivers. The company’s Truly Iced Tea Hard Seltzer has led to accelerated growth for the Truly brand, which has witnessed more than double growth from the past year. It is also one of the fastest-growing companies in the RTD category, with continued strong growth from its Twisted Tea brand. The company also plans to launch the Dogfish Head cocktails to take advantage of the growing RTD market. The Truly brand has witnessed significant market share growth in the measured off-premise channel in the first quarter of 2021, outpacing the hard seltzer category by more than 2 times or 50 percentage points. In the second quarter, the company expects to launch the Truly Punch Hard Seltzer. This combined with Truly Iced Tea Hard Seltzer demonstrates Boston Beer’s innovation leadership in the Hard Seltzer category. The Zacks Consensus Estimate for the company’s 2021 sales and earnings suggests growth of 42.8% and 66.8%, respectively, from the year-ago period’s reported figures. The consensus estimate for 2021 EPS has been unchanged in the past 30 days. The stock has rallied 57.8% in the past year. Price and Consensus: SAM Molson Coors: The stock of this Chicago, IL-based leading beverage company has rallied 49.8% in the past year. The company is on track with its revitalization plan focused on achieving sustainable top-line growth by streamlining the organization and reinvesting resources into its brands and capabilities. It remains committed to growing its market share through innovation and premiumization. The company has taken several steps toward its hard seltzer ambition. Notably, its share in the U.S. hard seltzer segment increased to more than 50%, which is higher than what it was at the beginning of 2021. Its Topo Chico Hard Seltzer and Vizzy are gaining share in the United States, with Vizzy ranked in the top 10 U.S. industry growth brands in the first quarter, per IRR. Moreover, the company has entered the fast-growing RTD cocktails space with an exclusive equity and distribution agreement with Superbird and above-premium tequila-based Paloma. The company expects to deliver significant growth through the entire line-up of the fast-growing RTD cocktails. It is also positioned to benefit from its planned line-up of CBD beverages in the United States through Truss USA. The company’s consensus estimate for 2021 EPS has been unchanged in the past 30 days. Price and Consensus: TAP
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