Players in the Zacks Beverages – Alcohol industry have been witnessing higher commodity and logistics costs due to escalated input and packaging costs. Additionally, the industry participants have been keen on spending on advertising and marketing, which has resulted in higher operational costs. These elevated costs are likely to persist and may hurt the margins of alcohol makers. However, companies in the alcohol space are placed to benefit from the continued recovery across markets and channels, robust demand for premium and high-quality products, and innovative spirits. The diversification of product portfolios of alcohol companies has been helping boost their top lines. 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 AnheuserBusch InBev (BUD Quick QuoteBUD - Free Report) , Constellation Brands Inc. (STZ Quick QuoteSTZ - Free Report) , Brown-Forman (BF.B Quick QuoteBF.B - Free Report) , Molson Coors (TAP Quick QuoteTAP - Free Report) and The Boston Beer Company Inc. (SAM Quick QuoteSAM - Free Report) .

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. 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

Elevated Costs: Players in the alcohol industry have been enduring pressures from the ongoing impacts of inflationary labor, transportation and commodity costs. The industry players have been experiencing elevated ingredient and other input costs, including shipping and freight, labor, trucking, fuel, co-packing fees, and secondary packaging materials, leading to increased costs of sales and higher operating costs. These have been resulting in adverse gross and operating margins for beverage companies.

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. Rising 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. Growing 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 to some extent.

Premiumization & Product Diversification: Premiumization has been a key growth driver for players in the alcohol space due to consumers’ continued desires for refreshing and newer tastes. Many beverage companies are diversifying their product offerings to capture more sales. Alcohol companies have also been witnessing robust demand trends for premium and high-end products. As a result, the companies focused on innovation and portfolio premiumization stand to gain from today’s market. Players have been exploring opportunities beyond the traditional beer, whiskey, spirits and wine categories. Some popular variations that have gained traction include RTD spirits like canned wine and cocktails, hard seltzers, cider, and flavored malt beverages. To capitalize on the priority and consumer trends, companies have been resorting to innovative products. Notably, RTD has emerged as the fastest-growing alcohol segment. Many companies in the industry have collaborated to grow their shares in the fast-growing RTD category.

E-Commerce Development & Pricing Gains: Alcohol companies have been benefiting from the rise of e-commerce, and the recovery across markets and channels, boosting volume. 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. Additionally, companies have been benefiting from price increases and supply productivity savings, offsetting the effects of cost inflation. Effective marketing and exceptional commercial execution have been boosting sales of alcohol companies.

Zacks Industry Rank Indicates Dull Prospects

The Zacks Beverages – Alcohol industry is a 17-stock group within the broader Zacks Consumer Staples sector. The industry currently carries a Zacks Industry Rank #216. The rank places it at the bottom 14% 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 2023 have declined 2.2%.

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 Underperforms S&P 500

The Zacks Beverages – Alcohol industry has outperformed the broader sector and underperformed the S&P 500 in the past year.

The stocks in the industry have collectively gained 1% and the Zacks S&P 500 composite has rallied 22.6%, while the Zacks Consumer Staples sector has declined 3.4%.

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 17.74X compared with the S&P 500’s 18.7X and the sector’s 16.09X.

Over the last five years, the industry traded as high as 22.28X, as low as 17.74X and at the median of 20.49X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

5 Alcohol Beverages Stocks to Keep a Close Eye on

One stock in the Zacks Beverages – Alcohol space currently sports a Zacks Rank #1 (Strong Buy) and another stock has 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.

Boston Beer: The company is the largest premium craft brewer in the United States and commands a strong portfolio of globally recognized brands. It produces beer, malt beverages and cider products at company-owned breweries and under contract. We expect its continued focus on pricing, product innovation, growth of non-beer categories and brand development to boost its operational performance and position in the market. SAM is on track with growth of its Beyond Beer category. Beyond Beer is growing faster than the traditional beer market, and the company expects this trend to continue for several years.

SAM has been committed to the three-point growth plan focused on the revival of its Samuel Adams and Angry Orchard brands, cost-saving initiatives and long-term innovation. The company is focused on accelerated cost savings and efficiency projects, with savings directed toward further brand development. The Zacks Consensus Estimate for Boston Beer’s 2023 earnings suggests growth of 8.9% from the year-ago period’s reported figure. The consensus mark for the company’s 2023 earnings has been unchanged in the past 30 days. SAM has declined 3.1% in the past year. The company sports a Zacks Rank #1 at present.

Price and Consensus: SAM

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 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’ digital business has been gaining from 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 STZ’s fiscal 2024 earnings per share has moved up 2.1% in the past seven days. The consensus estimate for fiscal 2024 sales and earnings suggests growth of 6.7% and 11.5%, respectively, from the year-ago period’s reported figures. The STZ stock has gained 2.9% in the past year. It has a Zacks Rank #2 at present.

Price and Consensus: STZ

AnheuserBusch InBev: Also known as AB InBev, it is a global brewing company with more than 500 iconic brands. The 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. AB InBev has been gaining from continued consumer demand for its brand portfolio. Also, strong business momentum, owing to relentless execution, investment in its brands and accelerated digital transformation have been key drivers. The premiumization of the beer industry has been a key growth opportunity for AB InBev.

AB InBev 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 company remains focused on expanding its Beyond Beer portfolio, which has also been aiding the top line. The Zacks Consensus Estimate for AB InBev’s 2023 sales suggests growth of 5.1% from the year-ago period’s reported figure. BUD has rallied 17.6% in the past year. The company has a Zacks Rank #3 at present.

Price and Consensus: BUD

Brown-Forman: The Louisville, KY-based leading alcoholic beverages company has been benefiting from increased demand for its brands, mainly 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, Jack Daniel's Tennessee Whiskey has been the key contributor to the company’s growth in the United States. BF.B 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 by a penny in the past seven days. The Zacks Consensus Estimate for fiscal 2023 sales and earnings suggests growth of 5.7% and 5.8%, respectively, from the year-ago period’s reported figures. BF.B has declined 17% in the past year. It currently has a Zacks Rank #3.

Price and Consensus: BF.B

Molson Coors: The stock of this Chicago, IL-based leading beverage company has gained 18.9% in the past year. TAP is on track with its revitalization plan focused on achieving sustainable top-line growth by streamlining its 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 has been 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’ 2023 EPS has moved up by a penny in the past 30 days. The consensus estimate for 2023 sales and earnings suggests growth of 9.2% and 23.4%, respectively, from the year-ago period’s reported figures. TAP currently has a Zacks Rank #3.

Price and Consensus: TAP