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2 High-Priced Beer Stocks to Avoid

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By Peter Cohan

NEW YORK ( InvestorPlace) -- Do people drink less beer during periods of slow economic growth so they can save money, or do they drink more to drown their sorrows? The great thing about this question is that there are two publicly traded companies -- Anheuser-Busch InBev (BUD) and Molson Coors Brewing Company (TAP - Get Report) -- whose earnings we can analyze to gain insight into this question. And here's another: Should you invest in either company?

Beer is big business. According to First Research, the U.S. industry includes 400 brewers that account for $20 billion in annual sales. But it's a highly concentrated market, with eight companies controlling 90% of the sales. Among these, Anheuser-Busch (Budweiser brands) and MillerCoors (a joint venture between Molson Coors and SAB Miller, which features the Miller and Coors brands) are the biggest.

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  • The concentration in the industry makes sense given its economics. After all, the costs of buying beer raw materials, brewing, distributing and advertising are very high. Therefore it is easy for a company that isn't gaining market share to fall further behind, thanks to the high costs, and seek to be acquired by consolidators like InBev.

    But there is a parallel trend in the industry -- beer lovers who take advantage of cheap home brewing methods to start their own breweries. There are plenty of craft brewers, brewpubs and microbreweries that bring the country's total up to 1,753 establishments, according to the Brewers Association's 2010 report.
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  • Craft brewing seems to be gaining more popularity than the overall industry. Craft brewer dollar sales rose 15% in the first half of 2011 -- whereas SABMiller expected 2.5% growth for the industry in 2011.

    BUD appeared poised to grow faster than the industry when it announced results Wednesday. Analysts expected 2011's third-quarter revenue to rise 7% to $9.98 billion; operating profit was forecast to be up 2.1% to $3 billion; net income was poised to climb 3.7% to $1.58 billion; and earnings per share were estimated to be 98 cents -- four cents higher than in 2010.
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  • But BUD beat all the expectations when it reported Wednesday. Its revenues of $10.22 billion beat expectations by $240 million, or 2.4%; its earnings of $1.59 billion were $10 million above expectations, and its EPS of $1.09 were a whopping 11 cents higher than expected. The big negative in the quarter was that volumes sold in BUD's third quarter slipped 0.2% because of a 0.6% decline in beer and a 6.4% increase in non-beer beverages.

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