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If Niagara Falls poured beer, it would take about 11 hours to fill the global mug. Last year, the world population guzzled 2.2 billion hectoliters of the foamy stuff.
Beer is big business. There is space for many brewers, and even smaller players can do well -- Boston Beer (NYSE: SAM ) , which brews Sam Adams, is testament to that. Boston Beer's stock is up 250% in the past 18 months, proving that savvy brewers can do well even as consumer spending remains depressed.
But just like the soft drink industry, where Coca-Cola (NYSE: KO ) and PepsiCo (NYSE: PEP ) reign supreme, beer is dominated by big brewers. That's only natural; this is an industry characterized by benefits of scale, powerful brands, and massive distribution networks. Only so many companies can pull that off, and once they do, they are exasperatingly difficult to overthrow.
I won't beat around the bush: I am most excited about the prospects of behemoth brewmaster Anheuser-Busch (NYSE: BUD ) . But probably not for the reasons you think.
Scaling the suds
Anheuser sold just shy of 400 million hectoliters of beer for about $33 billion last year. By either measure, that makes it the largest brewer in the industry. As I mentioned above, that size has its benefits, and those benefits show up directly in margins. Take a look at EBITDA (that's earnings before interest, taxes, depreciation, and amortization -- a solid proxy for a company's operational profitability) margins for the biggest players in the industry below. As you can see, the more beer a company makes, the cheaper it can make it per liter.
Volume (million hls)
|SABMiller (OTC: SBMRY)||213,000||30.4%|
|Heineken (OTC: HINKY)||145,900||19.6%|
|Molson Coors (NYSE: TAP )||18,464||19.4%|
Source: S&P Capital IQ and company filings.
To hammer home just how big a deal scale is in this business, consider this: Anheuser generated more in EBITDA last year than those next four competitors combined.
Home-brewing the real story
One commonly cited ding to beer investments is that per-capital beer consumption in the U.S. is declining. I'm calling that blarney, for two reasons.
- That's the wrong data.
- Who cares about the U.S.?
On the per-capita consumption argument, of course it is going down in the U.S. lately. Americans are getting older. You know which age demographics drink the least? Those under the legal drinking age and the elderly. Each year, the percentage of the population that enters the latter category is outweighing those turning 21. When you back out these factors, you find that beer consumption per capita has been remarkably steady over the last 15 years. That's important, because it means beer is not going out of fashion in developed markets -- their populations are just aging. And that means consumers in developing markets, who are rapidly drinking more beer but still not nearly as much as Americans or Europeans, will continue to do so.
The U.S. is actually a very predictable market, and one that Anheuser dominates, capturing a full 40% of the overall pie every year.
That brings us to Latin America. Unlike the U.S., Latin America has a massive young population rapidly coming of age. More than 8 million Latin Americans turn 18 (the legal drinking age in almost every Latin American country) this year; only 4.5 million Americans turn 21. At the same time, the region is becoming richer, with GDP per capita across the region more than doubling in the past six years.
Demographics don't lie
Legal-age consumers drink more beer than underage ones. Richer consumers drink more beer than poorer ones. It should come as no surprise that the Latin American beer market is booming -- and should keep on doing so for decades to come.
And who will profit from all that growth? Many brewers, but none more than Anheuser-Busch.
Anheuser owns 61% of Companhia Bebidas das Americas (NYSE: ABV ) -- basically the Budweiser of Latin America. This Latin American brewer (known as Ambev) has been so successful that its market cap now actually trumps that of Anheuser Busch.
You can buy stock in Ambev directly (the shares Anheuser doesn't own trade on the New York Stock Exchange), if you want pure exposure to the Latin American story. My preference, on the other hand, would be to buy Anheuser, thereby getting its stable, dominant, and highly profitable business in developed markets along with its 61% stake in growth-kicker Ambev.
To look at it another way, $35 of Anheuser's $54 stock is invested in Ambev, which trades at a relatively high (but reasonable for such a fast-growing company) 13 times EBITDA. That means you get the rest of Anheuser's business -- and, mind you, two-thirds of Anheuser's revenue doesn't come from Ambev -- for just 1.3 times sales. That spells one thing: cheap.
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