The sinfully bullish case for Anheuser-Busch
Posted
Apr 07 2008, 12:38 PM
by
Anthony Mirhaydari
Rating:
Sin stocks have been getting a lot of attention lately. Shares of breweries, casino operators, tobacco growers, and weapons makers are once again being recognized for their recession-proof qualities. Normally dull Kiplinger’s Personal Finance ran a big piece on the sector recently, while BusinessWeek pointed out that a vice fund has outperformed a leading socially-responsible fund. After all, no matter what's happening to the stock market, the housing market, or the jobs market, people will continue their wanton ways.
This brings us to beer, America's alcoholic beverage of choice. Shunned for years by a public crazed by fancy wines, imported beers, and micro-brews, plain domestic beer looks ready for a renaissance as consumers retrench and get back to basics. Instead of $45 pinot noirs with accents of spice, berries, and rose petals, budget-conscious shoppers will opt for the cheap 12-pack. This bodes well for Anheuser-Busch, the largest brewer in the United States and the fourth-largest worldwide.
Lester Jones, chief economist of the Beer Institute, an industry group, sheds some light on this trend in his latest industry update. Using data from a survey of consumer expenditures by the Bureau of Labor Statistics, he found that while U.S. households spend about $426 on alcoholic beverages per year on average, there is a definite shift towards beer as income falls. For households with more than $50,000 in income, 41% of their "alcohol budget" is spent on beer. In comparison, this share is nearly 60% for lower income households. So, as consumers continue to feel poorer through declines in real income and home equity, look for beer sales to grow at the expense of fancier grape-based avenues to inebriation.
A freshly completed annual survey of U.S. beer consumers by Morgan Stanley analyst William Pecoriello provides empirical evidence. A full 41% of respondents said they now have less money to spend on booze versus a few months ago. Of these, 60% are reducing visits to bars and restaurants, 50% are reducing the number of drinks they consume when they do venture out, and 15% are trading down to cheaper drinks.
It's worth noting that while bar and restaurant sales of alcohol represent only 25% of total sales, the vast majority of craft beers and a large chunk of imported beers are sold there. Not surprisingly, the analysts are cutting back their sales growth forecast for high-end brews. Meanwhile, cheap beers have nothing to fear: 92% of sub-premium beers are consumed at home.
Anheuser-Busch is well positioned to take advantage of the upcoming shift. It already commands a 49% share of the U.S. beer market, with its flagship Budweiser and Bud Light brands alone comprising a 32% share. Economies of scale and brand recognition have allowed the company to capture three-quarters of its industry's operating profits. Flush with cash, the brewer is free to reinvest in new products, new acquisitions, and new marketing initiatives -- perpetuating its dominance. Bottles of brand-new Bud Light Lime and Budweiser American Ale are already on the way, while a new business unit is being created to boost Michelob's fortunes.
William is looking for Anheuser-Busch to report lukewarm first-quarter results on April 23, driving expectations down just as the season of backyard barbeques and ballgames gets started. The warmer summer months should accelerate the trade-down trend and push shares higher as the country’s economic woes continue to drive haggard investors into the sin sector.
Assuming moderate volume growth and stable margins -- which won’t be easy given rising input prices -- William is looking for earnings of $3.26 per share next year. If the price-earnings multiple returns to its five-year average of 18.3, shares could be trading right around $60 by this time next year -- a 24% increase from here.
(Disclosure: I don't own any shares of the companies mentioned in this post.)
