Warren Buffett thinks you should only invest in what you understand.
And, for better or worse, I think we all are intimately familiar with the following companies.
You can’t escape them in the summer, nor in the winter, when people need something to “stave off the cold.”
It is hard not to notice the absurd amount of money people will part with in order to get their hands on these companies’ products too
In the summer it is barbecues, pool parties, boating, fishing, and crab feasts here in Maryland
In the colder months, it is Halloween parties, Thanksgiving, Christmas, and New Year’s. Also, just about any day when it is too cold to go out, and it is dark by the time you leave work.
Half the people going to anything remotely social are bound to bring some along. When we go to ball games and aren’t allowed to take ours, we’ll easily pay 1,000% more than they’re worth.
No matter how we’re enjoying ourselves, chances are we’re guzzling them down until spouses start frowning or it’s time to start worrying about legal driving limits.
As much beer as we collectively consume, many people overlook how profitable these companies can be in the long term.
Today I’m going to outline five simple ways capture part of those profits for yourself.
All have beaten the S&P 500 over the last decade.
If you want to find growth plays, there are two that have trounced the gains in the broader market.
If you want lower volatility income stocks with long-term growth potential, I have three that will work for you as well.
The Growth Plays
People like to pretend that “craft brewing” is a new and exciting development in the U.S.A. In reality, it’s more of a return to our roots.
English settlers were brewing ales as quickly as possible, and German immigrants brought over tons of equipment and plenty of experience with lagers. Nearly every town had a brewery, and the bigger cities were home to several.
Refrigeration and interstate highways changed all of that. Massive consolidation started in the 1950s and left us with a handful of worldwide corporations dominating the industry today.
But renewed broad interest in small-label beers and locally brewed beer led to national attention, and a new trend based on how old traditions took hold.
Craft brewers reached 11% volume of the total U.S. beer market, saw a 18% rise in volume, 22% increase in retail dollar value, and 19.3% of the dollar share of the total U.S. beer market in 2014.
It is a little early for 2015 numbers, but all metrics are expected to improve.
There aren’t many publicly traded craft breweries, but there are two available if you can stomach the high earnings-per-share values associated with growth plays.
First up is the well-established Boston Beer Co. Inc. (NYSE: SAM), maker of the Sam Adams brews.
At a $2.6 billion market cap, it isn’t exactly a small brewery anymore, though it is still below the 6 million barrel threshold for craft breweries. Shares trade just over $200.
The P/E ratio has fallen over 2015 from the 40s to 27.16, in spite of revenue growth, making it a more reasonable stock to purchase.
In 2010, SAM pulled in $463.80 million. In 2014, it made $903.01 million, averaging out to 18.12% year-to-year for the last five years.
With three quarters of 2015 on the books, Sam Adams is already up to $744.79, putting it on course to easily set a new record.
SAM is virtually debt free, cash flow is healthy, and it has plenty of room to grow in the national market still.
In addition to the popular beers, the company captured 40% of the small but rapidly expanding American cider market within a year of introducing its Angry Orchard line.
If growth can be maintained in this sub-sector, SAM will start pulling in some serious revenue from it.
The second pure-play for smaller breweries is the Craft Brew Alliance Inc. (NASDAQ: BREW). This is a relatively new way to play the craft beer craze, considering the company was formed when two breweries in the Pacific Northwest — Widmer Brothers and Redhook Ale — merged in 2008.
The company has a market cap of about $160.5 million with a P/E ratio of 96.09. At market open today, shares were at $8.37.
The company grew very rapidly, but ran into a bit of trouble in recent quarters.
Third quarter 2015 numbers were disappointing overall as well. Results missed analyst estimates, though full-year guidance was maintained.
Revenue grew by 5% and EPS went up a cent to $0.04, but that isn’t inspiring as craft brewing as a whole outpaces the company.
However, shares still went up a good 30% in the four weeks after Q3 2015 results were released, bringing the company off two-year lows.
New management has brought in a new business plan, and at its size, the company is ripe for a takeover in a sector that has seen the massive international companies swallowing the smaller companies in exchange for hefty premiums.
Improving financial results, a takeover attempt, or both, are the profit catalysts to watch for with this one.
As for how both companies compared over time to the broader market, this 10-year chart should say it all:
Going Big For Dividends
If betting on the growth of craft brewers in a fully saturated, competitive market isn’t your style, you have some options.
After all, consolidation in the beer and booze market has been going on for decades. First, it was the major domestic brewers who got bought up. Then, over the last couple decades, it went fully international.
Three of these massive corporations stand out for investors who are in it for long-term growth and dividend income.
The first is Anheuser-Busch Inbev SA (NYSE: BUD). AB Inbev, in its current form, was the creation of a merger between Belgium and Brazil-based Inbev with Anheuser-Busch in 2008.
The company has over 200 brands of beer, operates in about 20 countries, and sells its products in over 130 countries. 2014 revenue hit $47 billion, and the first three quarters of 2015 have already seen $43.3 billion in revenue.
Right now, the company, along with SABMiller plc, which trades on the London exchange, are having governments around the globe review a massive merger proposal.
Before any spin-offs or asset sales, the companies combined would have a market capitalization of about $300 billion.
AB Inbev alone has a market cap of $203 billion, a 24.59 P/E ratio, and a 3.16% dividend yield. Shares opened at $125 today.
Historically, net margins are above 30%, making it one of the strongest plays in the sector.
However, all eyes are on the possible merger right now, which will affect the next company, Molson Coors Brewing Co. (NYSE: TAP), as well.
SABMiller hoping to sell its 50% voting interest and 58% economic interest in MillerCoors to Molson Coors, its partner in the joint venture, for around $12 billion. Included in the deal is exclusive rights to the Miller brand name.
That brand is worth quite a bit on its own. It is one of the highest-selling beer franchises in the world, and has registered very strong global growth as well.
It pales in comparison to AB Inbev and SABMiller with a $17.31 billion market cap, the P/E ratio is high at 42.19, and the yield is at 1.75%.
If the company can secure rights to the Miller brand name, it may be the biggest winner of the AB Inbev/ SABMiller merger, in regards to percentage gains in revenue and profit growth.
The final company we’ll take a look at is Diageo plc (NYSE: DEO), maker of the much-adored Guinness. This company also carries a wide range of hugely popular liquors and is the largest liquor producer in the world.
The company has a $68.85 billion market cap, 19.55 P/E ratio, and a 3.13% yield. Shares trade around $109.
The company’s brands are mature, so it uses an aggressive acquisition growth strategy that has the unfortunate side effect of relatively high debt. The plan backfired in the short term as it had to sell off some businesses to condense its portfolio.
That hasn’t stopped it from pumping out tons of cash though. Management returned over $10 billion to shareholders over the last five years. This has mainly come from dividends, and management is obviously reluctant to repurchase shares.
If you’re familiar with my rants about buybacks replacing meaningful capital expenditure that is needed to keep revenues growing, you know I’m on board with that.
As for how these three sector heavyweights have done compared to the S&P 500, here is the chart:
Welcome Back to the Grind
So there you have it. I hope you were able to unwind and take some time off over the last week. Regardless of if you did or did not, you’re the target market for these five brewers.
Plus, with a fresh new year and a new set of high expectations, I’m pretty sure most of us will be supporting one of these companies by Friday.
Might as well get a little bit back from them, eh?
