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Softness in Beer Hurt Alcohol Stocks, Can Cannabis Change Fate?

Zacks Equity Research

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, malt and other spirits, mainly constitute the Zacks Beverages – Alcohol industry.

However, some of industry players also engage in production and sale of non-alcoholic beverages including carbonated soft drinks, sparkling waters, bottled water, energy drinks, powdered and natural juices, and ready-to-drink teas.

These companies, mostly the brewers (beer makers), sell products through a network of wholesalers, as well as to 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 its breweries engaging consumers in the freshest beers.

Here are the industry’s three major themes:

  • Beer brands in the United States are struggling due to the industry-wide softening beer shipment volumes. This is mainly due to increasing health consciousness among consumers and strong competition from other alcohol beverages. Consumers are now drinking less, emphasizing quality drinks. With growing importance of premiumization, premium and super-premium beer varieties are witnessing growth. Additionally, health-conscious consumers are turning to low and no alcohol varieties, which have given wine greater prominence of late. Consequently, beer makers are now concentrating on introducing flavored varieties with low-alcohol content, alongside diversifying to include non-alcoholic beverages and energy drinks in their portfolio.
     
  • Another major headwind facing the industry is higher input costs, particularly due to increased tariffs on aluminum (which have raised packaging costs) and higher freight costs. 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 started experiencing the negative effects of increased tariffs on exports of spirits (due to the U.S.-China trade war), which is beginning to hurt top and bottom lines.
     
  • A key trend that is driving the alcoholic beverage market is cannabis-infused beverages. Alcoholic beverage makers are exploring the cannabis segment to recover lost sales as the beer market has taken a hit. Notably, alcohol companies including Constellation Brands (STZ), Molson Coors and Heineken have expanded in the Canadian marijuana space to develop cannabis-infused drinks. More recently, Anheuser-Busch entered into a partnership with Tilray (TLRY) to conduct joint research on non-alcoholic, cannabis-infused beverages.


Per market research firm IRI Worldwide, beer sales volume across retail stores were down 0.3% from Jan 1, 2018 through Nov 4. Per the Beer Institute, a trade group that represents the largest beer companies in the United States, shipments of beer brewed in the country declined about 2.9% in 2018 as of the same date. This was clearly demonstrated by soft beer sales of biggies like Heineken (HEINY), Molson Coors (TAP) and Anheuser-Busch (BUD).
 

Zacks Industry Rank Indicates Cloudy Prospects

The Zacks Beverages – Alcohol industry, which is housed within the broader Zacks Consumer Staples sector, currently carries a Zacks Industry Rank #216. This rank places it at the bottom 16% 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 bleak 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 negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing hope in this group’s earnings growth potential. In the past year, the industry’s earnings estimates for the current year have declined by nearly 18.4%.

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 in Terms of Shareholder Returns

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

The stocks in this industry collectively slumped 27.1%, much wider than the Zacks S&P 500 composite’s decline of 7% and the Zacks Consumer Staples sector’s fall of 18.6% over this period.

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 19.25X compared with the S&P 500’s 15.38X and the sector’s 16.81X.

Over the last five years, the industry has traded as high as 27.48X, as low as 18.50X, and at the median of 22.69X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

Bottom Line

The alcohol beverages space is in the doldrums due to the change in consumer preference and higher costs. Further, the company is likely to witness pronounced impacts from the increased tariffs on the export of spirits. Nonetheless, investments in cannabis-infused drinks and focus on innovative low-alcoholic beverages to satisfy the health-conscious consumers should present a long-term growth opportunity.

None of the stocks in the Zacks Beverages – Alcohol universe currently holds Zacks Rank #1 (Strong Buy) or 2 (Buy). However, we suggest four stocks with Zacks Rank #3 (Hold) from the same industry, which investors may hold on to. You can see the complete list of today’s Zacks #1 Rank stocks here.

Let’s have a look at them.

The Boston Beer Company Inc. (SAM): The stock of this Boston, MA-based company, which is the largest craft brewer in the United States, has rallied 23.4% in the past year. The Zacks Consensus Estimate for the current year has been stable in the last 60 days. It carries a Zacks Rank #3.

Price and Consensus: SAM


 

Brown-Forman Corporation (BF.B): The stock of this Louisville, KY-based company has improved 1.3% in the past month. The Zacks Consensus Estimate for the current year has been revised up by a penny in the last 30 days. It carries a Zacks Rank #3.

Price and Consensus: BF.B

 

Ambev S.A. (ABEV): This Brazil-based company produces, distributes, and sells beer, draft beer, carbonated soft drinks (CSD), other non-alcoholic beverages and malt in the Americas. It carries a Zacks Rank #3 and the stock has surged 7.7% in the past month. The Zacks Consensus Estimate for the company’s current fiscal EPS has remained unchanged in the last 60 days.

Price and Consensus: ABEV

 

Castle Brands Inc. (ROX): The stock of this New York-based company, which produces and sells alcohol and non-alcoholic beverage products in the United States, Canada, Europe, and Asia, has rallied 8.6% in the past month. The Zacks Consensus Estimate for the current year has been stable in the last 60 days. It carries a Zacks Rank #3.

Price and Consensus: ROX

 

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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
Tilray, Inc. (TLRY) : Free Stock Analysis Report
 
Molson Coors Brewing Company (TAP) : Free Stock Analysis Report
 
Constellation Brands Inc (STZ) : Free Stock Analysis Report
 
The Boston Beer Company, Inc. (SAM) : Free Stock Analysis Report
 
Castle Brands, Inc. (ROX) : Free Stock Analysis Report
 
Heineken NV (HEINY) : Free Stock Analysis Report
 
Anheuser-Busch InBev SA/NV (BUD) : Free Stock Analysis Report
 
Brown-Forman Corporation (BF.B) : Free Stock Analysis Report
 
Ambev S.A. (ABEV) : Free Stock Analysis Report
 
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