Investors have been gulping down stocks in the beverage sector, sending the Dow Jones Beverage Index up about 20% for the year -- a rare sector success story. But like the foam on the head of a beer, analysts say it probably won't last.
"It cannot continue its performance. It might hang on to its gains, but these stocks are close to or above their fair value, and it's tough to see the valuations go up from here," said John Faucher, U.S. beverage analyst for J.P. Morgan. A spokeswoman for J.P. Morgan said the firm has conducted banking business for publicly traded beverage companies.
Caroline Levy, a beverage analyst for UBS Warburg, partially agrees. Anheuser-Busch (BUD), for example, has a price/earnings ratio of 26.8.
"That's the highest premium it's had in 20 years as a relative multiple to the S&P," Levy said. "We think the stock is fairly valued. It's had a great run, but we don't see it going any higher."UBS Warburg has done banking business for publicly traded beverage companies. Coca-Cola (KO - Get Report), however, with a P/E of 33.5, is a different story, according to Levy. She said Coke's multiple has stayed high despite the weak economy, internal problems at the beverage giant and currency valuation changes. Those problems are now behind it, she said, and Coke could see some gains. "The stock could still go up," Levy said. And because of stocks such as Coke, Levy said, the beverage index could still go higher. Stocks in the beverage index include such highfliers such as Leading Brands (LBIX - Get Report), up 132% year-to-date; Big Rock Brewery (BEERF), up 80% for the year; Pepsi Bottling (PBG), up 38%; and a few losers such as Golden State Vintners (VINT), down 40% for the year. The Dow Jones Distillers and Brewery Index is up about 23%, and the Dow Jones Soft Drinks Index is up about 20% for the year. To be sure, analysts aren't expecting the beverage sector to sink. Most beverage companies have avoided disappointing news recently, and the sector remains a relatively safe bet. "The market is still defensive, and people are looking for areas where there is visibility, and it's an industry where you see volume growth," said Ann Gurkin, a beverage analyst for Davenport & Co. Margins have been good for many products. This is because, in part, beverages' costs have gone up, but the increases have been less than the rate of inflation, so consumers haven't appeared to mind. "And look what people pay for a bottle of water," Gurkin said. Perhaps surprisingly, several analysts said they didn't put much long-term weight in terms of growth to "malternatives," the latest in beverages that mix whiskey and cola or vodka with various flavorings. Beverage companies have been heavily marketing the new products, some with success. "They're more of a fad. It will do well for a year and a half and then fade away," Gurkin said. "They need to focus in on their core brands and get back to basics," said Amy Greene, a senior analyst with Avondale Partners. Many of these new products already appear to be factored into the valuations, Faucher said. "And they're fairly valued at this point." The combination of fair valuations and little reason to expect significant earnings growth from new products could limit the upside potential for a lot of these shares.