The U.S. beer market is facing a slowdown due to change in consumer preference toward healthier drinks. Consequently, health-conscious consumers have shifted their preference from beer to other low-alcohol options and wine. Additionally, the new generation prefers health drinks instead of alcohol. This has resulted in a significant decline in sales of brewers since the start of 2018.
The Brewers Association revealed that U.S. beer volume sales dipped 1% in 2017 while craft beer sales volumes improved 5%. However, the overall picture for beer sales has deteriorated in 2018 as is evident from soft sales volumes reported by several beer giants, including Budweiser maker Anheuser-Busch InBev (BUD - Free Report) , Craft Brew Alliance (BREW - Free Report) and more. Per market research firm IRI Worldwide, worldwide sales of craft beer across large-scale retail stores grew only 1.7% in the first half of 2018.
While some players with a diversified portfolio — which includes wines, spiked sparkling water and other spirits — are in the safe harbor, beer makers are now scrambling for options to satisfy changing consumer preferences. Notably, pure-play beer producers are now concentrating on introducing flavored varieties, with low-alcohol content, alongside diversifying to include non-alcoholic beverages and energy drinks in their portfolio.
As another lucrative option, beverage companies are increasingly exploring the cannabis market, which is gaining popularity as the legalization of cannabis trade in Canada is around the corner. Consequently, we have seen a few alcohol beverage giants like Constellation Brands (STZ - Free Report) , Molson Coors (TAP - Free Report) and Heineken (HEINY - Free Report) enter partnerships or acquire stakes to gain presence in the marijuana market as an option to replenish their troubled sales graphs.
Despite the sluggish backdrop, let’s try to ascertain which of the two beer giants— Boston Beer (SAM - Free Report) and Molson Coors — is a better investment option. We need to delve deeper into factors beyond rank, since both the companies carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Molson Coors’ market capitalization is nearly $14 billion while that of Boston Beer is $3.5 billion. Considering business size, Molson Coors undoubtedly has an edge and is better positioned over the long term, courtesy of its massive scale of operations. However, the industry-wide sluggishness in beer sales in the short-term is likely to equally affect both the companies.
Boston Beer’s net revenues advanced 10.2% in the second quarter of 2018. The top line gained from an improvement in shipment volume and double-digit depletions growth. Major innovations, quality and strong brands, alongside solid sales execution and support from distributors have been aiding depletions growth. Further, the company is gaining from strength in Twisted Tea, Truly Spiked & Sparkling, and Angry Orchard brands.
On the other hand, Molson Coors’ revenues fell 0.2% in second-quarter 2018. Sales were hurt by lower financial volume and the adoption of the revenue recognition accounting standard. On a constant-currency basis, net sales tumbled 1.9%.
Despite softness in Samuel Adams beer brand, Boston Beer is gaining from strength in its non-beer portfolio. However, Molson Coors portfolio mainly comprises of more than 65 leading beer brands, including Coors Light, Molson Canadian, Staropramen, and Carling as well as craft and specialty beers like Blue Moon, Creemore Springs and Cobra. Consequently, soft beer sales environment in the United States is hurting Molson Coors’ performance.
Earnings History and Estimate Revisions
Considering a more comprehensive earnings history, Boston Beer boasts a positive earnings surprise trend in five out of the trailing seven quarters. Conversely, Molson Coors has delivered negative earnings surprise in four out of the last seven quarters. Moreover, Boston Beer is advantageously positioned, with an average earnings surprise of 14.2% in the trailing four quarters. However, Molson Coors has delivered a negative earnings surprise of 6.8% in the last four quarters.
While comparing earnings estimates for the last 30 days, Boston Beer’s earnings estimates for 2018 have been stable at $7.09 per share, whereas that of Molson Coors have declined by 3 cents to $4.82. Further, Boston Beer’s earnings are expected to grow nearly 18% in 2018 compared with Molson Coors’ improvement of 7.8%. This indicates that analysts are more optimistic about Boston Beer’s performance.
Boston Beer’s shares have surged 94.5% in the past year against the broader industry’s 11.4% decline. Meanwhile, Molson Coors’ shares have declined 21.3%, wider than the broader industry and significantly underperforming Boston Beer’s growth.
SAM Vs. TAP Price Perfromance
Taking a broader view, Boston Beer has outperformed the S&P 500 index’s growth of 17.8% while Molson Coors significantly lagged the broader market’s growth.
From valuation perspective, Boston Beer is overvalued compared with the industry average while Molson Coors is undervalued. Consequently, valuation suggests that there’s more upside left for Molson Coors. Boston Beer has a trailing 12-month price-to-earnings (P/E) ratio of 48.4, which is higher than the industry’s average of 26.9. Conversely, Molson Coors has a significantly lower P/E of 15x. Moreover, Molson Coors’ Value Score of A in comparison with Boston Beer’s Value Score of D makes Molson Coors a preferred investors’ choice.
Return on Equity
Boston Beer has ROE of 17.2%, which is at par with the peer group’s average. Meanwhile, ROE for Molson Coors is 7%. On a comparative scale, Boston Beer is more efficient in using shareholders’ funds than Molson Coors.
Our comparative analysis shows that Boston Beer has an edge over Molson Coors, when considering future earnings, strong sales, good ROE and superb price performance. However, Molson Coors’ large scale of operations and cheaper valuation compared with Boston Beer cannot be ignored.
In conclusion, one has to consider that Boston Beer’s diversified portfolio is well positioned in this scenario, where the beer market is witnessing a slowdown. The company’s Angry Orchard, Twisted Tea, and Truly Spiked & Sparkling brands provide a cushion to its sales amid soft industry-wide beer sales. Further, Boston Beer has outperformed earnings estimates by a higher percentage and is expected to register strong earnings growth in 2018. This is why it may be a good idea to bet on Boston Beer over Molson Coors.
The Hottest Tech Mega-Trend of All
Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce ""the world's first trillionaires,"" but that should still leave plenty of money for regular investors who make the right trades early.
See Zacks' 3 Best Stocks to Play This Trend >>