As days get warmer and equity markets get frothier, some investors may be looking for something cooler. And what better place to find solace than inside your fridge?
The S&P 500 and Nasdaq indexes have reached record highs this year, clocking more than 12% and nearly 10% gains, respectively, for the year to date, as of April 30. Those looking for islands of investing opportunities in a sea of overvalued equities may want to look at beer stocks. Some of these purveyors of foamy beverages are trading at sizable discounts, implying a margin of safety.
As part of the noncyclical consumer staples Morningstar Category, these businesses are somewhat insulated from economic upheavals such as the one caused by the coronavirus pandemic. The following high-quality names enjoy dominant positions in a highly consolidated marketplace.
Constellation Brands Inc A STZ Current yield: 1.26% Forward P/E: 23.20 Price $237.19 Fair value: $250 Value Fairly valued Moat Wide Moat Trend Stable Star rating ***
Data as of May 27, 2021
Beer behemoth Constellation Brands is the largest multicategory alcohol supplier in the United States. The company’s portfolio of Mexican beers includes Corona and Modelo, for which it acquired exclusive U.S. ownership from AB InBev. In recent times, the brewer has been pivoting away from its spirits business. Constellation also owns 37% of cannabis firm Canopy Growth.
“We see the firm’s overall Mexican beer portfolio as auspiciously situated at the confluence of unwavering secular and demographic trends,” says a Morningstar equity report, noting that owing to an enviable growth profile and best-of-breed margins, “the beer business can thrive even amid an evolving industry landscape.”
The brewer’s wide economic moat, or sustainable competitive advantage, is underpinned by a combination of strong brands and geographical, political, and demographic factors, which “create a sublime set of intangible assets,” says analyst Nicholas Johnson, who recently upped the stock’s fair value to $250 from $240, prompted by strong fundamentals.
“Ultimately, the health of the business remains unassailable in our view, and while the discount in the shares isn’t glaring, we think this is a stock worth owning at current levels,” he asserts.
Molson Coors Brewing Co B TAP Current yield: - Forward P/E: 16.54 Price $57.37 Fair value: $64.00 Value 10% discount Moat None Moat Trend Negative Star rating ****
Data as of May 27, 2021
The world’s fifth-largest beer producer, Molson Coors boasts top-two positioning in the U.S., Canada, and many Central European markets. It’s stable of brands includes Blue Moon, Coors, Miller, Vizzy, and Staropramen. Molson also sells various partner brands including Amstel and Dos Equis in Canada and Corona in Central Europe.
Molson Coors has long been a mainstay of the global beer industry, with North American staples such as Coors and Miller and leading European brands such as Carling. However, these trademarks are not as strong as they once were, cautions a Morningstar equity report, but the firm continues to look for capital-efficient opportunities internationally and has also assembled an impressive portfolio of seltzers, “which should allow it to capture some growth from this secularly advantaged category.”
Molson Coors' recent performance has been dragged down, particularly in Europe, by a perfect storm of government-imposed lockdowns and pandemic restrictions. The brewer continues to control what it can, and investors could expect “progressively better performance throughout the year as the commercial environment improves and shipments outpace depletions to rebuild inventory,” says Johnson, who recently raised the stock’s fair value to $64 from $60, prompted by improved margins.
Anheuser-Busch InBev SA/NV ADR BUD Current yield: 1.64% Forward P/E: 64.10 Price $75.86 Fair value: $90 Value 16% discount Moat Wide Moat Trend Stable Star rating ****
Data as of May 27, 2021
Anheuser-Busch InBev is the world’s largest brewer. Its portfolio contains five of the top 10 beer brands, including popular names such as Stella Artois, Corona, and Budweiser. The brewer owns several brands, of which 18 boast retail sales over $1 billion each.
The company has made strategic acquisitions to assume a colossal global scale and regional density. “Management's strategy is to buy brands with a promising growth platform, expand distribution, and ruthlessly squeeze costs from the business,” says a Morningstar equity report.
A vast global scale and near-monopoly positions in Latin America and Africa afford ABI significant fixed-cost leverage and procurement pricing power. “AB InBev has one of the strongest cost advantages in our consumer defensive coverage and is among the most efficient operators,” claims Morningstar sector director Philip Gorham, who puts the stock’s fair value at $90.
These competitive advantages have helped the firm generate excess returns on invested capital and are also manifested in best-in-class operating and cash cycles, asset turnover ratios, and working capital management.
“Anheuser-Busch InBev has a wide economic moat, in our opinion, benefiting from both a cost advantage and intangible assets in its strongest markets,” asserts Gorham.