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Hard Seltzer Demand Sets the Stage for Alcohol Industry Growth

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Companies producing, importing, exporting, marketing and selling alcoholic beverages like beer, craft beer, draft beer, ciders, wine, rums, whiskey, liqueurs, vodksa, tequila, champagnes, brandy, amaretto, ready-to-drink cocktails and malt mainly constitute the Zacks Beverages – Alcohol industry. However, some of the industry players engage in the production and sale of non-alcoholic beverages like carbonated soft drinks, sparkling waters, bottled water, energy drinks, powdered and natural juices and ready-to-drink teas.

These companies, mostly brewers (beer makers), sell products through a network of wholesalers as well as 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. Additionally, some brewers operate brewpubs or taste rooms at breweries offering consumers the freshest beers.

Here are the industry’s three major themes:

  • Increased consumer inclination toward drinks with natural ingredients and low-alcohol content has hurt sales of beer and even wine in the United States. Total wine volume in the United States declined 0.9% year over year in 2019, marking the first decline in 25 years, according to market research firm IWSR. Beer volume in the United States slipped 2.3% in 2019, which was the fourth consecutive year of decline. The growing health-consciousness among drinkers and demand for better, refreshing beverages with more taste variations has brought distilled spirits and ready-to-drink (“RTD”) products to the limelight, particularly hard seltzers. Apparently, seltzers are stealing a large share from the beer, and wine & spirits categories, with a significant share sourced from the beer category. Per IWSR, hard seltzer volume in the United States was around 82.5 million cases in 2019 and volumes are expected to more than triple by 2023 to 281 million cases. To grab opportunities in hard seltzers, beer and wine behemoths like Boston Beer, Constellation Brands, Anheuser-Busch InBev BUD and Diageo are investing huge sums. Boston Beer has come up with new formulations for Truly flavors to make it the best-tasting hard seltzer around. Meanwhile, Brown-Forman will make its biggest investment ever for a single brand, of more than $40 million, to launch the Corona hard seltzer in spring 2020. Diageo is promoting the Smirnoff Seltzer with endorsements while Anheuser-Busch’s Natural Light Seltzer recently launched its newest flavor, a delicious strawberry-kiwi blend called House Rules.
  • Apart from hard seltzers, craft beverages and other spirit variations like bourbons, tequilas and American whiskey, are highly sought-after. With the stabilization of the U.S. economy, given lower unemployment and improved income, personal consumer budgets now include more discretionary income. This makes premiumization a prime focus area, with premium and super-premium spirits like whiskey, vodka and tequila, witnessing growth. According to Nielsen, categories like lower-ABV spirits/cordials, lower-ABV RTD cocktails, more alternative beverages with no- or low-sugar and carbs, low-calorie options, and lifestyle-oriented drinks will witness growth in 2020. Investments in CBD-infused drinks are also likely to witness continued growth in 2020. Moreover, it expects suppliers and distributors in the United States to increase focus on expansion in the e-commerce channel, marking a turning point for the industry. Additionally, packaging is likely to play a key role in 2020, particularly for the growth of RTDs, as the convenience of slim cans and alternative packaging will continue to attract consumers.
  • A major concern for the industry is escalating input costs and higher packaging costs due to a larger proportion of variety packs in the product mix. These along with higher advertising and promotional expenses as well as increased SG&A costs are weighing on margins. Additionally, some companies in the space are experiencing the negative effects of increased tariffs on exports of spirits (due to the U.S.-China trade war), which is beginning to hurt the top and the bottom lines.

Zacks Industry Rank Indicates Strong 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 #101. This rank places it in the top 40% 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 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 Lags S&P 500 and Sector

The Zacks Beverages – Alcohol industry has underperformed the S&P 500 and its own sector over the past year.

While the stocks in this industry have collectively gained 4.9%, the Zacks S&P 500 composite and Zacks Consumer Staples sector have rallied 22.1% and 11.2%, respectively.

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 23.59X compared with the S&P 500’s 19.62X and the sector’s 19.09X.

Over the last five years, the industry has traded as high as 27.52X, as low as 18.91X, and at the median of 23.15X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

Bottom Line

Companies in the alcohol industry are likely to benefit from increased demand for hard seltzers as health-conscious drinkers continue to look for better and refreshing beverages. Additionally, robust demand for craft beverages, tequilas, whiskey, bourbons and vodka, as well as super-premium and high-end brands are likely to aid alcohol industry’s growth in 2020. Other trends to rule the industry in 2020 are the premiumization, innovation, cans and alternative packaging, as well as online sales of alcoholic beverages. However, higher costs and persistently soft beer sales are likely to weigh on the performance of industry participants.

We have one stock in the Zacks Beverages – Alcohol universe that currently sports a Zacks Rank #1 (Strong Buy). We also highlight four stocks with a Zacks Rank #3 (Hold) from the same industry. You can see the complete list of today’s Zacks #1 Rank stocks here.

Let’s have a look at them.

Constellation Brands Inc STZ: The stock of this Victor, NY-based company, which is the third-largest beer company and a leading, high-end wine company in the United States, has rallied 14.8% in the past year. The Zacks Consensus Estimate for its next-year earnings has increased 1.8% in the past 30 days. It carries a Zacks Rank #2.

Price and Consensus: STZ

Brown-Forman Corporation BF.B: The stock of this Louisville, KY-based company has risen 43.9% in the past year. The Zacks Consensus Estimate for its current fiscal-year earnings has been stable in the past 30 days. It carries a Zacks Rank #3.

Price and Consensus: BF.B

Molson Coors Beverage Company TAP: This Denver, CO -based company is a global manufacturer and seller of beer and other beverage products. It has an impressive diverse portfolio of owned and partner brands. It carries a Zacks Rank #3 and the stock has rallied 9.1% in the past six months. The Zacks Consensus Estimate for the company’s next-year earnings has been unchanged in the past 30 days.

Price and Consensus: TAP

The Boston Beer Company Inc. (SAM - Free Report) : The stock of this Boston, MA-based company, which is the largest craft brewer in the United States, has rallied 38.9% in the past year. The Zacks Consensus Estimate for its next-year earnings has been stable in the past 30 days. It carries a Zacks Rank #3.

Price and Consensus: SAM

Diageo plc DEO: The stock of this London-based company has rallied 6.8% in the past year. The company is involved in producing, distilling, brewing, bottling, packaging as well as distributing spirits, wine and beer. It operates in around 180 countries. The Zacks Consensus Estimate for its next fiscal-year earnings has moved up by a penny in the last seven days. It carries a Zacks Rank #3.

Price and Consensus: DEO

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