Many investors who have bet heavily on American brewers over the last year may be feeling somewhat giddy.
Although the Standard & Poor's 500-stock index has fallen 19 percent over the last 12 months, shares of Anheuser-Busch and Adolph Coors, for example, have both risen by more than 19 percent.
PHOTO: NY TIMES
The long-term outlook for the industry remains strong, said Jeffrey G. Kanter, a Prudential Securities beverage analyst, but he cautioned that because brewers' share prices have risen so much in recent months, they may not move much higher over the short term. "Next year could be a great year for the business but a tougher year for the stocks," he said, because the stocks are starting from a higher base.
For investors who are comfortable with considerably more risk, there may be greater opportunity for short-term gain in microbreweries like Boston Beer, the maker of Samuel Adams beers, because it likely to grow rapidly, Kanter said.
Many analysts chalk up the enthusiasm for beer stocks to demographics. Children of baby boomers are just reaching college age, Kanter said, and "22-year-olds drink a lot more beer than 33-year-olds."
Beer sales were relatively flat in the 1990s, but are expected to grow about 1.5 percent this year, a rate that Kanter said could continue for 10 years as more boomer children reach drinking age. Many analysts say they believe that sales will probably keep growing regardless of the strength of the economy.
"Even in hard times, people don't stop drinking beer," said Lewis R. Piantedosi, co-manager of the Eaton Vance Large-Cap Core fund, which owns shares of Anheuser-Busch. "And they may even drink more."
The sluggish economy has pared the number of business and leisure travelers, who drink much of the pricier wines and top-shelf liquors, said Marc Greenberg, a beverage analyst at Deutsche Bank. Yet that trend is not likely to take a bite out of Budweiser sales, he said.
"Investors tend to differentiate between beer, wine and spirits," Greenberg said. "But they are competing for the same consumers and the same shelf space. Beer-industry successes come at the expense of the wine and distiller businesses."
The big brewers fell out of favor with some investors a year ago because of increased competition from drinks called malt alternatives, like Smirnoff Ice from the British distiller Diageo, said Mark Swartzberg, a beverage analyst at Legg Mason, a Baltimore-based brokerage firm.
In July, the malt alternatives, aimed at younger drinkers, reached a 3.5 percent to 4 percent share of the domestic market for malt beverages, the broad category that is dominated by beer, but then began to slip, Swartzberg said. He predicts that this was the beginning of the end for them. "It was a classic fad," he said, "fueled by advertising spending at a time when ad rates were unusually low."
Anheuser-Busch of St. Louis, which makes Budweiser, Michelob, Busch and other beers, is by far the dominant company in the industry, with about half of the market. The company has a long history of steady earnings and share-price growth: over the last 10 years, the stock has risen more than 270 percent, cumulatively, through October, compared with about 110 percent for the S&P 500.
The company is not just an American brewer. It has subsidiaries that own theme parks, develop real estate and package beverages, and it has significant international operations.
Anheuser-Busch's earnings per share could grow about 10 percent a year for many years, said Piantedosi, whose Eaton Vance fund has a little less than 1 percent of its portfolio in the stock. His earnings growth estimate includes 2 percent from increased sales, 2 percent to 3 percent from regular price increases and the remaining 5 to 6 percent from share buybacks.
"The company has a great history of being shareholder friendly," Piantedosi said. The company has raised the dividend 10 percent a year, on average, in the last 10 years, he added, and it aggressively buys back stock, at an annual rate of 2 percent to 3 percent of total shares.
Shares of Coors, based in Golden, Colorado, were helped this year by the company's acquisition of the Carling business from Bass Brewers in Britain, part of Interbrew, for US$1.7 billion last December.
"It's debatable whether this makes Coors a better company," Kanter said. "But it does give them some more cash flow, and they are reinvesting that in advertising their domestic brands."
Coors, the third-largest American brewer behind Anheuser-Busch and Miller Brewing, has 11 percent of the US beer market, with brands like Coors Original, George Killian's Irish Red and Zima. But Coors Light accounts for four-fifths of its domestic sales, Kanter said.
Miller Brewing, with 19 percent of the market, makes Miller Genuine Draft, Miller Lite, Hamm's and other brands. In July, Philip Morris sold Miller to South African Breweries, which became SABMiller. Its primary listing is in London, and it is not traded in the US. Investors with a taste for risk might want to consider the microbrewers, Kanter said. Shares of Boston Beer and RedHook Ale Brewery of Seattle have both gone up sharply recently. Kanter favors Boston Beer because it has just begun offering a light beer, Sam Adams Light; the light-beer category has grown to 45 percent of US beer sales from 36 percent in 1995.
Boston Beer has less than 1 percent of the total domestic beer market, Kanter said, so it has plenty of room to grow. Its shares closed at US$15.75 on Friday, up 18.42 percent over the last 12 months. Its price-to-earnings ratio has soared to 52.5, compared with an average of about 20 for the company over the last four years. At its current rich price, an investment now is a bet that Sam Adams Light will be a hit.
The company has staked much hope on the new product. "Sam Adams Light is a bet-the-ranch proposition," he said.
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