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Alcohol Outlook: Soft Beer Demand & High Costs to Hurt

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The Beverages – Alcohol industry seems to be losing fizz of late due to the fading popularity of craft beer, which was once a hit among American drinkers. This shift comes from increasing health consciousness among the new generation as well as greater preference for wine over beer. Consequently, beer shipments have witnessed grave declines this year, as is clear from soft beer sales of majors like The Boston Beer Company Inc. (SAM - Free Report) , Molson Coors (TAP - Free Report) and Anheuser-Busch InBev SA/NV (BUD - Free Report) . Per market research firm IRI Worldwide, worldwide sales of craft beer across large-scale retail stores grew only 1.7% in the first half of 2018.

Consequently, beer makers are now concentrating on introducing flavored varieties with low-alcohol content, alongside diversifying to include non-alcoholic beverages and energy drinks in their portfolio. Furthermore, exploring the cannabis segment has been an attraction for players suffering from soft beer sales, as the marijuana industry is getting official approval in many regions (soon to be legalized in Canada) for recreational uses, on top of medical usage.

Recently, Constellation Brands (STZ - Free Report) expanded its stake in the biggest listed cannabis company — Canopy Growth Corp. (CGC - Free Report) — thus confirming its focus on building a global cannabis platform. Likewise, Molson Coors and marijuana firm Hydropothecary Corp. have created a joint venture to take advantage of the industry’s growth. Additionally, Heineken (HEINY - Free Report) has launched Hi-Fi Hops, a cannabis-infused sparkling water in California (where recreational marijuana is legal).

Simultaneously, players dealing in non-beer categories including wine, whiskey, Spiked & Sparkling and others are poised to gain from this craft beer switchover. Some names that can benefit here are Brown-Forman’s (BF.B - Free Report) Jack Daniel’s Whiskey range and Constellation Brands’ wine portfolio.

Before the industry could shore up, the attack of President Donald Trump’s tariffs on aluminum took a toll on its cost dynamics. The tariffs imposed earlier this year, have made the production of aluminum cans to package beer and other drinks expensive, thereby hurting the profits of beverage makers. Understandably, higher costs are now being passed on to consumers in the form of price increases. Recently, Boston Beer announced its intention of raising prices in the second half of 2018, while Molson Coors has decided to hike prices of its beers for Chicago-area retailers.

Concurrently, the price of Brown-Forman’s Jack Daniel’s Tennessee Whiskey is slated to increase in the European Union due to the implementation of a 25% increase in tariffs on U.S. imports, including whiskey. These tariffs were imposed in response to President Donald Trump’s decision to levy tariff on European steel and aluminum.

According to The Beer Institute, a trade group that represents the largest beer companies in the United States, aluminum tariffs will cost U.S. breweries $347 million a year. Notably, 60% of the beer made and sold in the United States comes in aluminum cans and bottles.

Industry Lags in Terms of Shareholder Returns

Looking at shareholder returns over the past year, it appears that the softness in the beer segment, the consumers’ shift to healthy options and higher aluminum costs have largely tampered investors’ confidence in the industry’s growth prospects. Moreover, options like the introduction of cannabis-infused drinks, and diversification to low-alcoholic and health drinks are in their early stages and not enough to support a recovery in the industry any time soon.

The Beverages – Alcohol Industry, which is an 18-stock group within the broader Zacks Consumer Staples Sector, has underperformed both the S&P 500 and its own sector over the past year.

While the stocks in this industry have collectively lost 7.4% in a year, the Zacks S&P 500 Composite has rallied 17.9%. Additionally, the Zacks Consumer Staples Sector has declined 7%, reflecting a modestly lower loss compared with the industry.
 

One-Year Price Performance

However, it’s worth noting that there was a significant lack of synchronization in the performance of individual stocks within the group. While some Alcohol stocks are suffering from increased exposure to the beer segment, others with a more diversified portfolio and financial backing are able to stabilize their revenue graphs, leading to better performance. Nonetheless, industry concerns regarding higher costs are likely to weigh on margins, which should lower profits.

Beverages – Alcohol Stocks Look Expensive

Despite the underperformance of the industry over the past year, the valuation currently looks really expensive. One might get a good sense of the industry’s relative valuation by looking at its price-to-earnings ratio (P/E), which is the most appropriate multiple for valuing Consumer Staples stocks because of their efficiency in gauging earnings performance.    

This ratio essentially measures a stock’s current market value relative to its earnings performance. Investors believe that the lower the P/E, the higher will be the value of the stock.

Generally, the price of a stock rallies on a rise in earnings. As earnings forecasts move higher, demand for the stock should drive its price. If the P/E of a stock is rising steadily, it means that investors are pinning their hopes on the company’s inherent strength.

The industry currently has a trailing 12-month P/E ratio of 27.4, which is below the high and median levels of 36.5 and 32.3, respectively, over the past year. While this shows there is significant upside potential, the industry looks expensive compared with the market at large.

The space has a P/E considerably higher than the trailing 12-month P/E ratio of 19.8 for the S&P 500, with the median level at 20.1.

Price-to-Earnings Ratio (TTM)

Underperformance May Continue Due to Bleak Earnings Outlook

Expectations of higher costs due to rise in tariffs on aluminum should continue to impact the profits of players across the industry. Moreover, costs incurred to diversify to new products are likely to put a burden on the earnings graph. This along with the consumers’ withdrawal from craft beer is likely to result in softer returns to shareholders in the near future.

But what really matters to investors is whether this group has the potential to perform better than the broader market in the quarters ahead. While the above ratio analysis shows that there is a solid value-oriented path ahead, one should not really consider the current price levels as good entry points unless there are convincing reasons to predict a rebound in the near term.

One reliable measure that can help investors understand the industry’s prospects for a solid price performance is the earnings outlook for its member companies. Empirical research shows that a company’s earnings outlook significantly influences the performance of its stock.

One could get a good sense of a company’s earnings outlook by comparing the consensus earnings expectation for the current financial year with last year’s reported number, but an effective measure could be the magnitude and direction of the recent change in earnings estimates.

Looking at the aggregate estimate revisions, it appears that analysts are not hopeful of this group’s earnings potential.
 

Price and Consensus: Zacks Beverages – Alcohol Industry

 

The consensus EPS estimate for the current fiscal year has been revised down since Jan 31, 2018.

Current Fiscal Year EPS Estimate Revisions


Zacks Industry Rank Indicates Cloudy Prospects

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates continued underperformance in the near term.

The Zacks Beverages – Alcohol industry currently carries a Zacks Industry Rank #251, which places it at the bottom 2% of more than 250 Zacks industries. 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.

Our proprietary Heat Map shows that the industry’s rank has stuck to a relatively wide range over the past eight weeks. In this period, the industry’s rank rose to 209 before slipping to 251 last week but is still in the bottom 50% of the Zacks-ranked industries.


Beverages – Alcohol: Earnings & Revenue Trends

The past earnings trend of the Beverages – Alcohol space reveals that the bottom line for the group has been range bound over the past few years. Looking closely, we note that earnings have witnessed a steep decline after the September 2017 quarter, before reflecting a recovery in the June 2018 quarter.

Beverages – Alcohol EPS

 

Revenues for the Zacks Beverages – Alcohol industry have been volatile over the past few years. A closer look reveals that revenues for the group have been declining since the start of 2018.

Beverages – Alcohol Revenues


Bottom Line

Though the growth in the cannabis market seems to be a lucrative long-term opportunity for the stocks in this group, the near-term picture looks muddy due to the change in consumer preference and higher costs. In fact, the impact of the higher tariff on aluminum, which is likely to unfold in the quarters to come, is going to gravely affect the group’s growth in various markets. The increase in prices and troubles in imports may significantly impact demand for alcohol drinks in many markets.

The industry might not be able to tide over the broader challenges in the near term. So it may not be a good idea to bet on this space right now.

On that note, we have highlighted a stock that investors should pass up.

Anheuser-Busch: The stock of this Belgium-based company has declined 16% in the past year. The Zacks Consensus Estimate for the current year has witnessed negative estimate revision of 4 cents in the last 30 days. It carries a Zacks Rank #4 (Sell).

(You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.)

Price and Consensus: BUD


Brown-Forman Corporation: This Louisville, KY-based company is a major producer and distributor of premium alcoholic beverages in the world. It carries a Zacks Rank #4 (Sell) and has declined 3.8% year to date. The Zacks Consensus Estimate for the company’s current fiscal EPS has moved down by 2 cents in the last 60 days.

Price and Consensus: BF.B


Ambev S.A. (ABEV - Free Report) : The stock of this Brazil-based company has declined 26.6% in the past year. The Zacks Consensus Estimate for the current year has been revised down by a penny negative in the last 30 days. It carries a Zacks Rank #4 (Sell).

Price and Consensus: ABEV


Kirin Holdings Co. (KNBWY - Free Report) : This Tokyo-based company is a producer and distributor of alcoholic and non-alcoholic beverages, and pharmaceuticals and bio-chemicals in Japan and internationally. The stock has lost 18.9% in the last three months. It carries a Zacks Rank #4 (Sell). The current fiscal-year consensus EPS estimate has dropped by 7 cents in the last 30 days.

Price and Consensus: KNBWY


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