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4 Lucrative Alcohol Stocks to Watch as Industry Trends Recover
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Players in the Zacks Beverages – Alcohol industry have been benefiting from the continued recovery in the on-premise channel, robust demand in the off-premise channel and the revival of Travel Retail. Continued online and e-commerce investments, as well as a focus on innovation and premiumization, have been drivers. Companies are expected to benefit from the momentum in spirits and ready-to-drink (RTD) cocktails. Investments in product innovations, premiumization and technology platforms bode well for players like Diageo Plc (DEO - Free Report) , AnheuserBusch InBev (BUD - Free Report) , Constellation Brands Inc. (STZ - Free Report) and Brown-Forman (BF.B - Free Report) .
However, supply-chain disruptions, which have led to product shortages due to port congestion-related supply delays, have been headwinds. 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. The 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
Premiumization & Product Diversification: Premiumization has been a key growth driver for players in the alcohol space due to consumers’ continued desire for refreshing and newer tastes. The companies in the industry have been focused on investing in crafting a diverse portfolio of global and specialty premium brands. The companies have been exploring opportunities beyond the traditional beer, whiskey, spirits and wine categories. Some popular variations that have gained traction include Ready to Drink (RTD) spirits like canned wine and canned cocktails, hard seltzers, cider, and flavored malt beverages. To capitalize on the consumer trends, companies have been resorting to innovative products. Notably, RTD has emerged as the fastest-growing alcohol segment since 2018. The same is expected to rise 29% over the next three years, per IWSR Drinks Market Analysis. Most companies in the industry have made collaborations to growth their shares in the fast-growing RTD category.
E-Commerce Development & Recovery Across Markets: Companies in the alcohol space have been gaining from the rise of e-commerce, a recovery in the on-premise channel, continued demand in off-premise, and the revival of tourism and the Travel Retail business. These have led to volume growth for beverage companies. Companies have been benefiting from price increases and supply productivity savings, which have been offsetting the effects of cost inflation. Effective marketing and exceptional commercial execution have been boosting the sale of alcohol companies. Investments in online and e-commerce portals have gained prominence. Companies have been investing in the latest capabilities and leveraging technology to better connect with customers and consumers. With a recovery in markets and channels, and the expansion of digital capabilities, players in the alcohol space look well-poised for growth.
Supply-Chain Disruptions & Elevated 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 industry 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 expect supply-chain issues to prevail in the near term.
Players in the alcohol industry are also anticipated to witness higher advertising and promotional expenses, as well as SG&A costs, further threatening profitability. Rising brand investments and increased freight to distributors due to higher volumes are resulting in elevated advertising, promotional and selling expenses. Growing external costs, increased compensation expenses and higher discretionary spending are expected to drive SG&A deleverage.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Beverages – Alcohol industry is an 18-stock group within the broader Zacks Consumer Staples sector. The industry currently carries a Zacks Industry Rank #72. The rank places it at the top 29% 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 bright 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 top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential.
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 Outperforms S&P 500
The Zacks Beverages – Alcohol industry has outperformed the S&P 500 and the broader sector in the past year.
While the stocks in the industry have collectively lost 2.3%, the Zacks S&P 500 composite and the Zacks Consumer Staples sector have declined 14.1% and 6.4%, respectively.
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 23.23X compared with the S&P 500’s 17.07X and the sector’s 18.83X.
Over the last five years, the industry traded as high as 29.22X, as low as 18.78X and at the median of 24.02X, 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 selected 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.
Diageo Plc: The largest alcoholic beverage company based in London has been benefiting from the continued recovery in the on-trade channel, strong consumer demand in off-trade and market share gains. Robust growth in super-premium-plus brands, particularly scotch, tequila and Chinese white spirits, have been resulting in a positive price/mix. Growth is likely to be driven by its premiumization efforts, market recovery, pricing actions and supply productivity savings, which are likely to offset the cost inflation. 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 net sales growth across North America, Europe and the Asia Pacific in fiscal 2023, driven by continued premiumization efforts and favorable industry trends, particularly in the spirits category. DEO has declined 10.3% in the past year and currently carries a Zacks Rank #2. The Zacks Consensus Estimate for DEO’s fiscal 2023 sales and earnings suggests growth of 15.7% and 7.7%, respectively, from the year-ago period’s reported figures. The consensus estimate for current-year earnings has moved down 1% in the past seven days.
Price and Consensus: DEO
AnheuserBusch InBev: The company, also known as AB InBev, is a global brewing company with more than 500 iconic brands. It has been gaining from its leading position in the majority of the markets and a strong global footprint, which lend the advantage of economies of scale and growing its multi-country brands globally. The company has been investing in developing a diverse portfolio of global, international, and crafts and specialty premium brands in its markets. The premiumization of the beer industry has been a key growth opportunity for AB InBev. Continued business momentum, owing to relentless execution, investment in its brands and accelerated digital transformation, have been the key to its growth story.
The Leuven, Belgium-based company is steadfastly growing its Beyond Beer portfolio, including 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. The Zacks Consensus Estimate for AB InBev’s 2022 sales and earnings suggests growth of 8.2% and 5.3%, respectively, from the year-ago period’s reported figures. The consensus mark for 2022 earnings has been unchanged in the past 30 days. BUD has declined 19.9% in the past year. It carries a Zacks Rank #3 at present.
Price and Consensus: BUD
Constellation Brands Inc: 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 the latest products. STZ is poised to benefit from its premiumization strategy, driven by the continued strength in the Modelo and Corona Brand Family, as well as growth in the Power Brands. The beer segment has been gaining from premiumization, driven by growth in the traditional beer and flavors category, including seltzers, flavored beer, RTD spirits, and flavored malt beverages. The company has been making investments to fuel growth of its power brands through innovation, capitalizing on priority and consumer trends, with successful product introductions. STZ is also on track to invest in the next phase of capacity expansion in Mexico.
Constellation Brands has been benefiting from consumers’ shift to e-commerce for buying alcoholic beverages. Its 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 2023 earnings per share (EPS) has moved up 0.2% in the past 30 days. The consensus estimate for fiscal 2023 sales and earnings suggests growth of 7.6% and 7.2%, respectively, from the year-ago period’s reported figures. The STZ stock has rallied 16.8% in the past year. It has a Zacks Rank #3 at present.
Price and Consensus: STZ
Brown-Forman: The Louisville, KY-based leading alcoholic beverages company has been benefiting from increased demand for its brands, mainly the Jack Daniel’s Tennessee Whiskey, and growth across all regions and the Travel Retail channel. The company is focused on investing in the diversification of its brand portfolio to drive growth. For more than a decade, the Jack Daniel's Tennessee Whiskey has been the key contributor of growth in the United States. The company is investing in organically accelerating growth of two fast-growing spirits categories, bourbon and tequila. The balanced portfolio investments are likely to support its record of consistent growth.
The consensus estimate for Brown-Forman’s fiscal 2023 EPS has moved down 1% in the past seven days. The Zacks Consensus Estimate for fiscal 2023 sales and earnings suggests growth of 3.3% and 12.1% from the year-ago period’s reported figure. BF.B has risen 2.2% in the past year. It currently has a Zacks Rank #3.
Price and Consensus: BF.B
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4 Lucrative Alcohol Stocks to Watch as Industry Trends Recover
Players in the Zacks Beverages – Alcohol industry have been benefiting from the continued recovery in the on-premise channel, robust demand in the off-premise channel and the revival of Travel Retail. Continued online and e-commerce investments, as well as a focus on innovation and premiumization, have been drivers. Companies are expected to benefit from the momentum in spirits and ready-to-drink (RTD) cocktails. Investments in product innovations, premiumization and technology platforms bode well for players like Diageo Plc (DEO - Free Report) , AnheuserBusch InBev (BUD - Free Report) , Constellation Brands Inc. (STZ - Free Report) and Brown-Forman (BF.B - Free Report) .
However, supply-chain disruptions, which have led to product shortages due to port congestion-related supply delays, have been headwinds. 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. The 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
Premiumization & Product Diversification: Premiumization has been a key growth driver for players in the alcohol space due to consumers’ continued desire for refreshing and newer tastes. The companies in the industry have been focused on investing in crafting a diverse portfolio of global and specialty premium brands. The companies have been exploring opportunities beyond the traditional beer, whiskey, spirits and wine categories. Some popular variations that have gained traction include Ready to Drink (RTD) spirits like canned wine and canned cocktails, hard seltzers, cider, and flavored malt beverages. To capitalize on the consumer trends, companies have been resorting to innovative products. Notably, RTD has emerged as the fastest-growing alcohol segment since 2018. The same is expected to rise 29% over the next three years, per IWSR Drinks Market Analysis. Most companies in the industry have made collaborations to growth their shares in the fast-growing RTD category.
E-Commerce Development & Recovery Across Markets: Companies in the alcohol space have been gaining from the rise of e-commerce, a recovery in the on-premise channel, continued demand in off-premise, and the revival of tourism and the Travel Retail business. These have led to volume growth for beverage companies. Companies have been benefiting from price increases and supply productivity savings, which have been offsetting the effects of cost inflation. Effective marketing and exceptional commercial execution have been boosting the sale of alcohol companies. Investments in online and e-commerce portals have gained prominence. Companies have been investing in the latest capabilities and leveraging technology to better connect with customers and consumers. With a recovery in markets and channels, and the expansion of digital capabilities, players in the alcohol space look well-poised for growth.
Supply-Chain Disruptions & Elevated 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 industry 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 expect supply-chain issues to prevail in the near term.
Players in the alcohol industry are also anticipated to witness higher advertising and promotional expenses, as well as SG&A costs, further threatening profitability. Rising brand investments and increased freight to distributors due to higher volumes are resulting in elevated advertising, promotional and selling expenses. Growing external costs, increased compensation expenses and higher discretionary spending are expected to drive SG&A deleverage.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Beverages – Alcohol industry is an 18-stock group within the broader Zacks Consumer Staples sector. The industry currently carries a Zacks Industry Rank #72. The rank places it at the top 29% 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 bright 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 top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential.
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 Outperforms S&P 500
The Zacks Beverages – Alcohol industry has outperformed the S&P 500 and the broader sector in the past year.
While the stocks in the industry have collectively lost 2.3%, the Zacks S&P 500 composite and the Zacks Consumer Staples sector have declined 14.1% and 6.4%, respectively.
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 23.23X compared with the S&P 500’s 17.07X and the sector’s 18.83X.
Over the last five years, the industry traded as high as 29.22X, as low as 18.78X and at the median of 24.02X, 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 selected 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.
Diageo Plc: The largest alcoholic beverage company based in London has been benefiting from the continued recovery in the on-trade channel, strong consumer demand in off-trade and market share gains. Robust growth in super-premium-plus brands, particularly scotch, tequila and Chinese white spirits, have been resulting in a positive price/mix. Growth is likely to be driven by its premiumization efforts, market recovery, pricing actions and supply productivity savings, which are likely to offset the cost inflation. 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 net sales growth across North America, Europe and the Asia Pacific in fiscal 2023, driven by continued premiumization efforts and favorable industry trends, particularly in the spirits category. DEO has declined 10.3% in the past year and currently carries a Zacks Rank #2. The Zacks Consensus Estimate for DEO’s fiscal 2023 sales and earnings suggests growth of 15.7% and 7.7%, respectively, from the year-ago period’s reported figures. The consensus estimate for current-year earnings has moved down 1% in the past seven days.
Price and Consensus: DEO
AnheuserBusch InBev: The company, also known as AB InBev, is a global brewing company with more than 500 iconic brands. It has been gaining from its leading position in the majority of the markets and a strong global footprint, which lend the advantage of economies of scale and growing its multi-country brands globally. The company has been investing in developing a diverse portfolio of global, international, and crafts and specialty premium brands in its markets. The premiumization of the beer industry has been a key growth opportunity for AB InBev. Continued business momentum, owing to relentless execution, investment in its brands and accelerated digital transformation, have been the key to its growth story.
The Leuven, Belgium-based company is steadfastly growing its Beyond Beer portfolio, including 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. The Zacks Consensus Estimate for AB InBev’s 2022 sales and earnings suggests growth of 8.2% and 5.3%, respectively, from the year-ago period’s reported figures. The consensus mark for 2022 earnings has been unchanged in the past 30 days. BUD has declined 19.9% in the past year. It carries a Zacks Rank #3 at present.
Price and Consensus: BUD
Constellation Brands Inc: 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 the latest products. STZ is poised to benefit from its premiumization strategy, driven by the continued strength in the Modelo and Corona Brand Family, as well as growth in the Power Brands. The beer segment has been gaining from premiumization, driven by growth in the traditional beer and flavors category, including seltzers, flavored beer, RTD spirits, and flavored malt beverages. The company has been making investments to fuel growth of its power brands through innovation, capitalizing on priority and consumer trends, with successful product introductions. STZ is also on track to invest in the next phase of capacity expansion in Mexico.
Constellation Brands has been benefiting from consumers’ shift to e-commerce for buying alcoholic beverages. Its 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 2023 earnings per share (EPS) has moved up 0.2% in the past 30 days. The consensus estimate for fiscal 2023 sales and earnings suggests growth of 7.6% and 7.2%, respectively, from the year-ago period’s reported figures. The STZ stock has rallied 16.8% in the past year. It has a Zacks Rank #3 at present.
Price and Consensus: STZ
Brown-Forman: The Louisville, KY-based leading alcoholic beverages company has been benefiting from increased demand for its brands, mainly the Jack Daniel’s Tennessee Whiskey, and growth across all regions and the Travel Retail channel. The company is focused on investing in the diversification of its brand portfolio to drive growth. For more than a decade, the Jack Daniel's Tennessee Whiskey has been the key contributor of growth in the United States. The company is investing in organically accelerating growth of two fast-growing spirits categories, bourbon and tequila. The balanced portfolio investments are likely to support its record of consistent growth.
The consensus estimate for Brown-Forman’s fiscal 2023 EPS has moved down 1% in the past seven days. The Zacks Consensus Estimate for fiscal 2023 sales and earnings suggests growth of 3.3% and 12.1% from the year-ago period’s reported figure. BF.B has risen 2.2% in the past year. It currently has a Zacks Rank #3.
Price and Consensus: BF.B