Outlook For Alcohol Industry Dim On Soft Beer Sales & Tariffs

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 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 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 breweries offering consumers the freshest beers.

Here are the industry’s three major themes:

• Increased consumer inclination toward drinks with natural ingredients and low-alcohol content has hurt sales of alcoholic beverages in the United States. This is particularly concerning for most beer brands which are already grappling with a drop in shipment volumes. Naturally, premiumization is becoming the prime area of focus, with premium and super-premium beer varieties seeing growth. Likewise, wine, craft beverages and other spirit variations are pretty sought-after. As a result, beer makers are focusing on coming up with flavored varieties with low-alcohol content alongside venturing into non-alcoholic beverages and energy drinks. This is good news for premium and craft segments, which are poised for growth.
  
• As mentioned, the soft beer market trend has been beneficial for premium, craft beverages as well as innovative spirits’ variations. Traditional drinks like mead, ginger beer and gin are witnessing revived growth. Meanwhile, the industry trends for innovation like frozen alcohol slushies, tequilas, martinis, cocktails, wine pops and hard seltzers are favorable. Another 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 with the beer market taking a hit. Notably, alcohol companies including Constellation Brands (STZ), Molson Coors (TAP) and Heineken (HEINY) have expanded in the Canadian marijuana space to develop cannabis-infused drinks. Further, Anheuser-Busch (BUD) partnered with Tilray (TLRY) to conduct joint research on non-alcoholic, cannabis-infused beverages.
  
• A major concern for the industry is escalating 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 are 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. Notably, the cost of tariffs on American whiskey implemented by the European Union is hurting Brown-Forman’s (BF.B) top-line performance, with significant impact on its Jack Daniel’s family of brands in Europe.

Zacks Industry Rank Reflects Adverse Trends

The Zacks Beverages – Alcohol industry is an 18-stock group within the broader Zacks Consumer Staples sector. The industry currently carries a Zacks Industry Rank #223. This rank places it at the bottom 12% 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 gloomy 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 negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimate for the current year has moved down approximately 7.2%.

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 Outperforms Shareholder Returns

The Zacks Beverages – Alcohol industry has outperformed the S&P 500 and is almost on par with its sector over the past year.

While the stocks in this industry have collectively gained 6.6%, the Zacks S&P 500 Composite and Zacks Consumer Staples sector have rallied 0.2% and 6.7%, respectively.

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 23.94X compared with the S&P 500’s 19.51X and the sector’s 16.86X.

Over the last five years, the industry has traded as high as 27.52X, as low as 18.91X, and at the median of 23.15X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

Bottom Line

Companies in the alcohol industry are likely to benefit from efforts to offer low-or-no-alcohol variations. Product innovation with increased focus on premiumization, variations in taste, use of natural ingredients and cannabis-infused drinks should meet the growing consumer demand for healthy drinking alternatives. However, higher costs and tariff-related impacts on the export of spirits continue to weigh on the performance of industry participants. An unimpressive Zacks Industry Rank also raises concerns.

None of the stocks in the Zacks Beverages – Alcohol universe currently has a Zacks Rank #1 (Strong Buy) or 2 (Buy). However, we suggest four stocks with a 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 22% in the past year. The Zacks Consensus Estimate for its current-year earnings has been stable in the last seven days. It carries a Zacks Rank #3.

Price and Consensus: SAM

Brown-Forman Corporation: The stock of this Louisville, KY-based company has risen 22.6% in the past year. The Zacks Consensus Estimate for its current-year earnings has moved up a penny in the past 30 days. It carries a Zacks Rank #3.

Price and Consensus: BF.B

Ambev S.A. (ABEV): This Sao Paulo, Brazil-based company produces and sells beer, draft beer, carbonated soft drinks, other non-alcoholic beverages, malt, and food products in the Americas. It carries a Zacks Rank #3 and the stock has rallied 19.6% year to date. The Zacks Consensus Estimate for the company’s fiscal-year earnings has been unchanged in the past 30 days.

Price and Consensus: ABEV

Diageo (LON:DGE) plc (DEO): The stock of this London-based company has rallied 13% in the past year. The company is involved in producing, distilling, brewing, bottling, packaging as well as distributing spirits, wine and beer. It operates in around 180 countries. The Zacks Consensus Estimate for its current-year earnings has been stable in the past 30 days. It carries a Zacks Rank #3.

Price and Consensus: DEO

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