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Alcohol Industry Outlook Swings Between On-Premise & Off-Premise

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Companies producing, importing, exporting, marketing and selling alcoholic beverages like beer, craft beer, draft beer, ciders, wine, rums, whiskey, liqueurs, vodka, 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:

  • Amid the coronavirus pandemic, alcoholic beverage companies witnessed robust demand from early pantry-loading trends in late March as well as a gradual rise in online sales. The shelter-in-place orders during the pandemic have increased at-home consumption and pantry loading, which boosted off-premise (retail stores) sales. The online channel is benefiting as consumers are making fewer shopping trips. Meanwhile, the pandemic has dealt a great blow to the on-premise channel sales of many alcohol companies due to closure of bars, taprooms and restaurants. Travel bans have further halted the Travel Retail business. Clearly, the industry is witnessing a gradual shift in consumption trends from on-premise to off-premise. In this scenario, alcohol companies that can quickly shift focus and resources to the off-premise and online channels stand to gain as this trend is likely to stay in the near term.
     
  • Evident from the above discussion, the alcohol beverage industry witnessed mixed sales trends through the March-April period. Further, with the partial reopening of many U.S. states by mid-May, the industry is set for new challenges.  While muted on-premise sales due to the shelter-in-place orders persist, the retail sales outlook is tarnished by challenges related to the economic impacts on consumers and supply-chain disruptions. According to Nielsen, a rebalancing of off-premise and on-premise channel sales will be required to place the alcohol industry conditions back to the pre-COVID-19 levels. Nielsen data indicates that a sustained 22% volume growth across all alcohol categories sold off-premise will be required to balance-off the impacts from closed bars and restaurants. Additionally, with the on-premise channel gradually stabilizing, a reasonable support from recovery in on-premise alcohol consumption might influence the industry’s return to growth.
     
  • Escalation in input costs and higher packaging costs due to a larger proportion of variety packs in the product mix has been a major concern for the industry. 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 have been experiencing the negative effects of increased tariffs on exports of spirits (due to the U.S.-China trade war), which is hurting the top and bottom lines. To top it all, the global pandemic and the resulting effect on the global economy are likely to push up costs, which may hurt margins of alcohol companies.


Zacks Industry Rank Indicates Strong 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 #65. This rank places it at the top 26% 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 declined 17.7%, the Zacks S&P 500 composite has rallied 11.3% and Zacks Consumer Staples sector has declined 6.9%.

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 28.39X compared with the S&P 500’s 23.18X and the sector’s 20.27X.

Over the last five years, the industry has traded as high as 28.39X, as low as 18.8X and at the median of 23.2X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)


Bottom Line

Amid the coronavirus pandemic, the alcohol industry witnessed mixed trends with the halting of on-premise and Travel Retail channel sales, offset by a surge in sales in the off-premise and online channels. As the economy opens up, experts believe a rebalancing of the sales in the off-premise and on-premise channels may lead to a return to the pre-COVID-19 levels. However, higher costs and persistently soft beer sales remain challenges to the industry participants.

We have one stock in the Zacks Beverages – Alcohol universe that currently sports a Zacks Rank #1 (Strong Buy) and two stocks with a Zacks Rank #2 (Buy). We also highlight two 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.

Craft Brew Alliance, Inc. (BREW - Free Report) : The stock of this Portland, OR-based company has risen 10.2% 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 #1.

Price and Consensus: BREW


Constellation Brands Inc (STZ - Free Report) : 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 37.2% in the past three months. The company has an expected long-term earnings growth rate of 1.5%. It carries a Zacks Rank #2.

Price and Consensus: STZ


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 54.9% in the past year. The Zacks Consensus Estimate for its current-year earnings has increased 18.1% in the past 30 days. It carries a Zacks Rank #2.

Price and Consensus: SAM


Brown-Forman Corporation (BF.B - Free Report) : The stock of this Louisville, KY-based company has risen 18.8% in the past year. The company has reported positive earnings surprise of 2.3%, on average, in the trailing four quarters. It carries a Zacks Rank #3.

Price and Consensus: BF.B


Molson Coors Beverage Company (TAP - Free Report) : 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. Molson Coors currently carries a Zacks Rank #3. The stock has risen 2.8% in the past three months. The company has an expected long-term earnings growth rate of 6%.

Price and Consensus: TAP


5 Stocks Set to Double

Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.

Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.

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