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 help but notice the absurd amount of money people will part with in order to get their hands on these companies’ products.
Barbecues, pool parties, boating, fishing, crab feasts in Maryland; you name an event in the summer, and half the people there are bound to bring some along. When we go to ball games and aren’t allowed to, we’ll easily pay 1,000% more than they’re worth.
No matter how we’re enjoying the leisurely summer evenings, chances are we’re having fun 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 for savvy investors.
But today I’m going to outline five simple ways to invest.
All have beaten the S&P 500 over the last decade, and all are rated “buy” or “outperform” by an analyst consensus gathered by Reuters.
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 7.8% volume of the total U.S. beer market, and 14.3% of the dollar share of the total U.S. beer market in 2013. Craft beer sales were up 17.2% in 2013 alone.
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 $3 billion market cap, it isn’t exactly a small brewery anymore, though it is still below the six million barrel threshold for craft breweries. Shares trade around $232.40.
The P/E ratio is high at 40.91, but the company has posted very strong revenue growth. In 2010, SAM pulled in $463.80 million. In 2013, that had grown to $739.05 million, averaging out to 16.9% year-to-year for the last three years.
SAM is virtually debt free, cash-flow is healthy, and it has plenty of room to grow in the national market too.
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 $240 million with a P/E ratio of 54.60. Shares trade for about $12.70.
The company grew very rapidly, but ran into a bit of trouble earlier this year. Strong competition and tight operating margins led to a loss of $0.09 in the first quarter and a drop in share price.
However, the company posted great Q2 2014 numbers, with a jump back to $0.10 diluted EPS, net sales increasing 17%, and total beer shipments up 15%.
As for how both companies compared to the broader market, this 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. 2013 revenue hit $43.2 billion.
AB Inbev has a market cap of 173.2 billion, a 19.49 P/E ratio that is just a hair above the S&P 500 average, and a 1.86% dividend yield. Shares are trading at $108.35.
Historically, net margins are above 30%, making it one of the strongest plays in the sector.
Next up is Molson Coors Brewing Co. (NYSE: TAP). It pales in comparison to AB Inbev with a $13.15 billion market cap, but the P/E ratio and yield are slightly better at 18.94 and 2.08%, respectively.
The company just reported $1.57 EPS for Q2 2014, beating estimates by $0.11 and renewing interest from investors who were starting to ignore the company’s previously lackluster results.
If the company can keep earnings strong while ramping up growth, this could be the strongest growth and income hybrid play here.
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 $73.4 billion market cap, 16.55 P/E ratio and a 2.96% yield. Shares trade around $116.45.
The company’s brands are mature, so it uses an aggressive acquisition growth strategy that has the unfortunate side effect of relatively high debt. However, it can pump out tons of cash as well. Around 20% of Diageo’s revenues are converted to cash each quarter on average.
The company recently doubled its stake in India’s largest spirits maker and is digging deeper into Latin America and Asia. Further success in penetrating these and other emerging markets will drive share prices going forward.
As for how these three sector heavyweights have done compared to the S&P 500, here is the chart:
So there you have it. Good luck with these five solid beer plays; bottoms up!
