RealMoney Silver - This Bud's Not for You

This Bud's Not for You
By Vasu Vijayraghavan
RealMoney contributor
9/24/2007 1:12 PM EDT

Beer companies are in trouble. Anheuser Busch, with a market cap of $37.88 billion, is the second-largest beer company in the world after the English/South African brewer SABMiller (SBMRY) , which weighs in with a market cap of $43 billion.

Miller and Anheuser-Busch are competing neck and neck, but the problem remains that while global wine consumption increased 51% between 1999 and 2003, beer consumption decreased by 3% during that period. Currently, beer's market share in spirit consumption ranks at an all-time low of 53%.

Looking at the situation in greater detail, one finds that beer remains an all-time favorite beverage, China aside, in basically two developed countries -- the U.K. and Ireland. While per-capita consumption of beer in Ireland has more than doubled between 1970 and 2001, the analogous figures in a country like France, also known for high levels of alcohol consumption, show a decline of 36% in beer consumption.

Asia and Premium Brands a Focus

Given these trends, it is no surprise that beer companies are looking eastward to China, and, now, India. India is still a wild card, since alcohol consumption is still frowned upon for cultural reasons, although these prejudices are changing with the younger population.

Overall, Asia will represent 50% of the volume growth in beer consumption between 2006 and 2011, followed closely by Central and South America and Eastern Europe, each representing 19.5% of volume growth. Premium volumes are expected to grow by 43% between 2005 and 2015.

Comparing and Contrasting the Big Four

Besides Anheuser-Busch and SABMiller, any beer drinker will direct you to the Dutch company Heineken (HINKY) , with a market cap of $30 billion, and Canadian brewer Coors-Molson (TAP) , coming in last with a market cap of $8.82 billion. (It should be noted that despite the fact that Heineken and SABMiller are large-cap companies, the trading volume on both is extraordinarily light, presenting potential difficulty with entry and exit of positions.)

The latter company has made inroads into premium beer, recently forming a premium brewing subsidiary, AC Golden Brewing Company, in an attempt to slake the growing consumer thirst for "craft beers." Heineken is making an all-out attempt to penetrate and dominate the Russian market. SABMiller, for its part, is embarking on such doubtful ventures as Mexican-inspired chelada beer called "Miller Chill." I guess it's all a matter of taste, but I, for one, believe in classical beer flavors and am highly skeptical of newfangled beers.

The following table presents some comparative statistics for the four beermakers. Of the four, SABMiller which seems in the best shape overall, although its earnings growth was sluggish over the first half of 2007, resulting in a high PEG ratio. Anheuser-Busch, despite having the highest operating margins, is heavily in debt; Coors Molson is bleeding cash flow; and Heineken had negative earnings growth over the first six months of 2007.

I will examine each company individually below, but it is clear that things are not going well with anyone of these producers. All of the info below is extracted from the latest earnings release of each individual company.

Company	PEG	5-year stock return	1-year stock return	Change in free cash flow	Debt-equity ratio	Operating margins
Anheuser-Busch	2.09	0%	10.60%	19%	204%	20%
Coors-Molson	1.54	16%	50%	-576%	44%	13.50%
Heineken	NA	51%	51%	-24%	45%	10.40%
SABMiller	7.6	43%	49%	40%	48%	16%

Let's start with the company that seems to be doing the best. SABMiller reported strong results in Latin America (98% income growth and 25% of income), whereas the company's North American market was in the doldrums (-19% income growth and 12% of income). Income growth in the company's key South African segment stagnated at 3%, representing 35% of income.

Regarding product innovations, the company is targeting flavored alcohol drinks in places like South Africa. In North America, it is the second-largest brewer and is also focusing on the premium market there with its Sparks brand ale. One would hope that the company stops "innovating" into weird beer flavors and concentrates on premium brand development for classic beer brews.

Dutch company Heineken is also focusing on premium brands and developing markets, such as Russia. It has a license agreement with Anheuser-Busch to introduce Budweiser beer to Russia. Although volume growth was the highest in the Asia/Pacific region, at 31%, earnings before income and taxes (EBIT) grew by only 11.3% in Vietnam, Australia, China and Taiwan, representing 6% of total EBIT.

By contrast, beer volume and EBIT grew rapidly in Africa and the Middle East, at 16.5% and 34%, respectively; this region represented 18% of total EBIT. Central and Eastern Europe represent another development pole of this company, where beer volume and EBIT grew by 12% and 33.6%; this region represents 84% of total EBIT. Heineken shareholders should be especially happy with the growth in such Islamic markets as Egypt and Nigeria, where for the time being, competition remains scant.

Coors achieved an amazing result this quarter: substantial net income growth in North America. This region, which represented 45% of income, posted growth of 122%, while Canadian and European operations (64% and 17% of income, respectively) stagnated at growth rates of -3% and zero growth, respectively.

North American sales were driven by strong growth of Keystone Light and premium brand Blue Moon. Company management should be applauded by the moderate growth in cost of goods sold, which increased by only 0.5% per barrel. It should be noted that competitor Heineken's raw-material costs, by contrast, increased by 15%.

Anheuser-Busch saw sluggish growth overall in 2005 and 2006. North American operations still represent the cornerstone of the company's operations, but the company has also incorporated foreign brands such as Belgian beer Stella Artois into its portfolio. Equity partner brands now represent 21% of total beer volume.

However, the largest domestic brewer still remains troubled, as beer volume for U.S. brands increased by only 2.3%, so any growth the company reported resulted from the 6.8% volume growth in the above-mentioned equity brands. The 2.2% volume increase worldwide was primarily due to increased consumption in China, Canada and Mexico. However, Budweiser beer, for one, remains a big nonentity in Western Europe, as any American in Europe can attest.