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4 Promising Alcohol Stocks to Watch as Supply-Chain Woes Loom

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The Zacks Beverages – Alcohol industry has been witnessing rampant demand at bars and restaurants, with the reopening of the on-premise channel. Meanwhile, the demand for alcohol in e-commerce portals and off-premise continues unabated. Companies are expected to benefit from the momentum in spirits and ready-to-drink (RTD) cocktails. Investments in product innovations and technology platforms bode well for players like Diageo Plc (DEO - Free Report) , Constellation Brands Inc. (STZ - Free Report) , Molson Coors Beverage Company (TAP - Free Report) and The Duckhorn Portfolio (NAPA - Free Report) .

Though the demand environment remains robust, companies are struggling to meet the demand due to the ongoing supply-chain disruptions, which have led to product shortages due to port congestion-related supply delays. Escalated input, freight and packaging costs along with higher advertising expenses may continue to be headwinds.

About the Industry

The Zacks Beverages – Alcohol industry mainly comprises producers, importers, exporters, marketers and sellers of alcoholic beverages like beer, craft beer, ciders, wine, rum, whiskey, liqueurs, vodka, tequila, champagnes, brandy, amaretto, 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 industry participants 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

Supply-Chain Disruptions & Higher Freight Costs: Players in the alcohol industry have been witnessing pressures from the ongoing supply-chain constraints and the impacts of the inflationary labor, transportation and commodity costs. The players are experiencing elevated ingredient and other input costs, including shipping and freight, labor, trucking, fuel, co-packing fees, secondary packaging materials, and increased outbound freight costs, leading to increased costs of sales and higher operating costs. These are resulting in adverse gross and operating margins for beverage companies. Most companies and industry experts anticipate logistic issues, including shortages of shipping containers and global port congestion, to prevail in the near term.

Higher Costs: Apart from elevated input and packaging costs, players in the alcohol industry are anticipated to witness higher advertising and promotional expenses as well as SG&A costs, further threatening profitability. Higher brand investments, particularly in media, advertising, production and local marketing, and increased freight to distributors due to higher volumes are resulting in elevated advertising, promotional and selling expenses. Higher external costs, increased compensation expenses and higher discretionary spending are expected to drive SG&A deleverage. Most industry players expect the trend to continue in the near term, impacting profitability.

E-Commerce Development & Return of Off-Premise: The rise of e-commerce and the expansion of off-premise offerings have been key trend-setters amid the COVID-19 pandemic. Alcohol companies have gone ahead to bring changes in packaging to adapt to the rising off-premise demand and shifts to home consumption. Many alcohol producers have reinvented the packaging styles to offer beer, wine, cider and seltzers in cans and bottles. Additionally, online and e-commerce investments have gained prominence. With consumers now accustomed to online ordering of drinks and at-home consumption, the industry players expect the trends to sustain in the future. Simultaneously, the reopening of bars, pubs and restaurants to the full capacity is anticipated to lead to rampant consumption trends in the on-premise channel. This is likely to add to the ongoing demand in off-premise and e-commerce.

Product Diversification to Drive Growth: Another trend, which has gained prominence amid the pandemic, is expanding into newer product categories to gain market share. Companies in the industry have been gaining by introducing product types and lines to their portfolios. We have seen significant growth in demand for low- or no-alcohol drinks, including RTD cocktails, premiumized drinks, flavored alcohol beverages, pre-mixed cocktails, hard seltzers, hard kombucha, organic wines and canned cocktails. As the convenience of at-home drinking, and buying from stores and online will likely stay in the post-pandemic era, the industry participants are expected to witness a continued demand for canned and RTD beverages. Also, the increased awareness on wellness and health are likely to result in the continued momentum in low- or no-alcohol drinks’ demand.

Zacks Industry Rank Indicates Bleak Prospects

The Zacks Beverages – Alcohol industry is a 16-stock group within the broader Zacks Consumer Staples sector. The industry currently carries a Zacks Industry Rank #182. This rank places it at the bottom 28% 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 year, the industry’s earnings estimates for the current year have declined 4.8%.

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 and its sector in the past year.

While the stocks in the industry have collectively gained 4%, the Zacks S&P 500 composite has rallied 32.4% and the Zacks Consumer Staples sector has grown 5.9%.

One-Year Price Performance

Beverages - Alcohol Industry's Valuation

Based on the forward 12-month price-to-earnings (P/E) ratio, commonly used for valuing Consumer Staples stocks, the industry is currently trading at 26.54X compared with the S&P 500’s 22.04X and the sector’s 19.9X.

Over the last five years, the industry traded as high as 28.8X, as low as 18.78X and at the median of 23.74X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

4 Alcohol Beverages Stocks to Keep a Close Eye on

None of the stocks in the Zacks Beverages – Alcohol space currently sports a Zacks Rank #1 (Strong Buy) but we have highlighted one stock with a Zacks Rank #2 (Buy). Also, we have three Zacks Rank #3 (Hold) stocks to watch from the same industry. You can see the complete list of today’s Zacks #1 Rank stocks here.

Let’s have a look at the companies.

Duckhorn: The company, formerly known as Mallard Intermediate, Inc., produces and sells wines in North America. Duckhorn’s brand equity, diversified omni-channel platform and highly flexible supply chain position it to capitalize on the heightened interest and demand for high-quality wine. These have also been aiding NAPA’s sales and volume growth.

The Saint Helena, CA-based company sells wines to distributors. NAPA also sells the same directly to retail accounts and consumers. The Zacks Consensus Estimate for Duckhorn’s 2021 sales and earnings suggests growth of 6.2% and 7.4%, respectively, from the year-ago period’s reported figures. The consensus mark for 2021 earnings has moved up 7.9% in the past 30 days. NAPA has risen 18% in the past year and carries a Zacks Rank #2 at present.

Price and Consensus: NAPA

Diageo: The largest alcoholic beverage company, based in London, has been benefiting from strong consumer demand in North America as bars and restaurants reopen on the easing of lockdowns, driving replenishment of stocks at bars and restaurants. The company expects market growth in North America to return to historical levels of mid-single digits in fiscal 2022. Growth is likely to be driven by the benefits of lapping soft on-trade comparisons. DEO is poised to benefit from continued investments in marketing and innovation to capture organic sales growth in its well-positioned premium brands’ portfolio.

Diageo has been relentlessly working to leverage its existing e-commerce capabilities and accelerate investments in the online platform. The company expects the operating margin to improve in fiscal 2022, driven by a further recovery in sales volumes, positive channel mix and premiumization trends. DEO has rallied 32.2% in the past year and currently carries a Zacks Rank #3. The Zacks Consensus Estimate for DEO’s fiscal 2022 sales and earnings suggests growth of 27.9% and 0.8%, respectively, from the year-ago period’s reported figures. The consensus estimate for current-year earnings has been unchanged in the past 30 days.

Price and Consensus: DEO

Constellation Brands: The Victor, NY-based third-largest beer company and a leading, high-end wine company in the United States, has been benefiting from the constant focus on brand building and initiatives to include new products. STZ is poised to benefit from continued strength in the Modelo and Corona Brand Family as well as growth in the Power Brands. Constellation Brands has been benefiting from consumers’ shift to e-commerce for buying alcoholic beverages. It is also on track with its plans to invest in the next phase of capacity expansion in Mexico.

Constellation Brands’ 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 Constellation Brands’ fiscal 2022 earnings per share (EPS) has moved down 0.3% in the past 30 days. However, the consensus estimate for fiscal 2022 earnings suggests growth of 0.3% from the year-ago period’s reported figure. STZ stock has gained 13.4% in the past year and has a Zacks Rank #3 at present.

Price and Consensus: STZ

Molson Coors: The stock of this Chicago, IL-based leading beverage company has gained 10.7% in the past year. TAP 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. Investments, partnerships and product launches, which are part of its revitalization plan, have been aiding the company. Molson Coors remains committed to growing its market share through innovation and premiumization. Intending to accelerate portfolio premiumization, TAP has been aggressively growing its above-premium portfolio in the past few years.

The consensus estimate for Molson Coors’ 2021 EPS has moved up 7.9% in the past 30 days. The consensus estimate for 2021 earnings suggests growth of 0.3% from the year-ago period’s reported figure. TAP currently has a Zacks Rank #3.

Price and Consensus: TAP