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This Brewer Has Growth on Tap

Philip Gorham, CFA, FRM

Heineken is the only truly global premium lager brand, and we see the firm as well-positioned to exploit the long-term trend of consumers demanding higher-quality alcoholic beverages.

At 8% global market share by volume, Heineken is a distant second behind Anheuser-Busch InBev, which controls more than one fourth of the market. But those volume figures don't tell the whole story. Heineken's consumers have higher incomes than drinkers of mainstream beer categories, where AB InBev dominates.

Demand for premium beer is also less subject to cyclical macroeconomic forces, and consumers are somewhat less price-sensitive. As a result, brand loyalty is a more significant source of economic moat for Heineken than it is for the other leading brewers.

Heineken's narrow economic moat is also supported by its cost advantage over smaller competitors. Heineken is the number-one or -two brewer in the majority of its large geographies and is the global leader in cider. This market leadership gives the firm a cost advantage, since brewing is a capital-intensive process that requires large investments in plant and equipment.

We expect Heineken's competitive positioning to strengthen over time and for the company to deliver long-term improvements to returns on capital. We therefore assign the firm a positive moat trend rating.

Our fair value estimate for Heineken's ADRs is $52 and shares are fairly valued today. At a wider margin of safety, though, Heineken is a solid investment opportunity.