A Vintage Year for Alcohol Stocks?


By James A. Anderson After a rough first quarter, with a swooning economy and stock market leading to layoffs, it's no time to toast beer and wine stocks, either. Anheuser-Busch (BUD) and Adolph Coors (RKY) are down 10% and 34% respectively. In fact, even after the market's recent rally, the sector has done worse than the Standard & Poor's 500 in 2001. An S&P index for the group has sagged 10%, vs. the 3.7% drop the benchmark has undergone since Jan. 1. But if you're an investor, you might want to keep an eye on this sector.

Truth is, such less-than-festive numbers are out of character for brewers and vineyards. They're normally considered defensive stocks. Even when the economy slows, beer and wine companies traditionally still make profits. One look at the industry's cartel-like structure and wide, wide margins and you can see why. The beer industry's top three -- Busch, Miller, which is a division of Philip Morris (MO), and Adolph Coors -- sit atop some 80% of the market. That's one reason why alcoholic-beverage makers can boast 20% operating margins, twice the percentage packaged-food companies are able to manage.

"This tends to be steady business," says S&P analyst Richard Joy. "The only thing you might notice is that consumers switch to cheaper brands. But they don't stop buying beer and wine, and these stocks tend to hold up well."

ON THE WAGON? Last year, investors stuck closely to the script. When signs that the bull market was wearying started cropping up in June, beer and wine shares rallied. Shares of Anheuser-Busch and Coors finished 2000 up 30% or more vs. the 9.1% drop in the S&P 500.

Come 2001, and suddenly it seemed that the market had turned sober. Beer and wine stocks started the year well, but made an about-face early in the second quarter, just about the time that battered tech shares started to stir. "It looks as if a lot of money shifted out of the defensive alcohol group into some of the big tech names," says Mark Greenberg, portfolio manager for Invesco's Leisure Fund. "Around Apr. 4, when Intel (INTC) started to edge up, you'll see that Anheuser-Busch hit its peak and began to back off of highs."

Investors are changing their mind just at a time when a number of beer and wine companies are enjoying very good fundamentals. Just look at the two factors analysts focus on when judging the industry. The first -- volume, the amount of beer or wine being sold -- is expected to increase in 2001. The Beer Institute, a trade association, predicts a 1.8% rise in volumes this year. S&P analyst Joy says wine producers might see an increase of around 5% in volume.

PROFITS ON TAP. There's good news, too, for the second ingredient in the profit formula: pricing. Last year's hikes have stuck, despite concerns that a softening economy might prompt brewers to hack at prices. S&P's Joy says some companies in the group are in line to enjoy 4% to 5% increases in pricing this year. Vineyards, too, could finish the year with 4% or so price gains, says Joy.

Mix boosts in volume and pricing and you have a strong brew -- potent enough to push Wall Street's expectations of profit growth up 13% this year, according to Zacks Investment Research statistics. And for a dominant player such as Anheuser-Busch, with its best-selling brands and mass-market appeal, things look even better.

Among the beer- and winemakers, Constellation Brands (STZ) seems like the best growth-and-value investment around. Formerly known as Canandaigua Brands, the company produces a long list of labels, ranging from Almaden and Manischewitz to Ravenswood. Constellation is also a star in beer, as the distributor of Corona, the favorite U.S. import.

Constellation's management has earned a reputation for growing the company's bottom line with a series of savvy acquisitions over the years. Yet the company is one of the cheapest stocks in the group. At their close of $68.01 on May 4, its shares fetched no more than a 11.4 multiple, based on a consensus earnings estimate of $5.99 a share for its fiscal year ending May 2002 as calculated by Zacks.

BUD'S DOMINANCE. "The company has a reputation for the lower-margin jug wines that were its mainstay earlier in the '90s," says S&P's Joy. "Over time, with mergers, that segment of their business has diminished in importance and now runs at about 20% of revenues." Joy thinks net sales for Constellation could leap some 15% in the company's current fiscal year. As a result, he thinks Constellation could reach $84 in the next 12 months. Five of the six analysts who follow the company rate its shares a strong buy or buy, and analysts project the company to grow earnings an average of 15.6% annually over the next five years.

Beer-industry leader Anheuser-Busch might be another stock to stick with during an economic lull. As the nation's favorite suds maker and the world's largest brewer, its Budweiser brand has helped the company cement its leading 49% market share. Still, Anheuser-Busch has worked hard to keep profits growing, too. Its Bud Lite has enjoyed solid growth, and the company's Tequiza brand, a tequila-flavored brew introduced in 1999, is now the third best-selling label among specialty and import beers.

S&P's Joy feels Anheuser-Busch should see net sales climb between 5% and 6% this year. On Wall Street, 12 out of the 16 analysts that cover the stock rate it a strong buy or buy, according to Zacks. Over the next five years, Wall Street looks for the company to grow earnings an average of 10.4% annually. Joy says Anheuser-Busch shares, which closed May 7 at $40.79 could well reach $52 in the next 12 months.

LONG-TERM CHEER. If you're looking to invest, don't expect to find a pure-alcohol stock fund. Portfolio managers tend to mix beer and wine stocks with positions in food or other consumer shares. Perhaps the closest offering to a sector fund is Fidelity's Select Food and Agriculture portfolio (FDFAX). According to Morningstar's latest tally of its holdings, the Food and Agriculture fund held a 6.3% stake in Anheuser-Busch, and had parked 2.8% and 1.3% of its assets in Coors and Constellation, respectively. The fund has exposure to the No. 2 beermaker, Miller, through a stake in Philip Morris. Also, management has stocked up on defensive-stock all-stars like grocer Safeway (SWY) and soft-drink maker Coca-Cola (KO). While the fund is off 5.6% so far in 2001, it rallied 29.8% last year.

In all, 2001 could shape up to be a good year for the beer-and-wine sector. And some factors make the industry look good over a longer period. Over the next 10 years, the number of adults in their prime drinking years is predicted to jump by 25 million. "Hot weather and demographics spur our industry," says Jeff Becker, president of the Beer Institute. "And over the next 10 years, we're looking at a great opportunity." Bottoms up. Anderson teaches journalism at the City University of New York. Follow his twice-monthly Sector Scope column, only on BW Online


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