Thus far, 2020 has been a forgettable year for shareholders in the alcoholic beverage industry. Sure, the pandemic lifted demand for some popular brands as at-home consumption spiked in niches like hard seltzer and premium imports. But overall, the major beer, wine, and spirits companies are seeing reduced global demand as consumers largely avoid bars, restaurants, and traditionally crowded events like concerts, where a large fraction of their wares are normally sold.
These changes in consumer behavior are expected to be temporary, which means investors might be tempted to buy Anheuser-Busch InBev (BUD 1.16%), shares of which are still down by 31% year to date. But you'd be better off building a position in its smaller but better-positioned peer, Constellation Brands (STZ 0.74%).
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Smaller is better
AB InBev boasts a global selling footprint and a huge portfolio of brands. It generates significant sales in places like China, Latin America, and Mexico, as well as the U.S. and Canada, while Constellation Brands focuses its efforts on the U.S. alone.
But Constellation's focus pays big dividends. It's the leading beer brewer in the higher-tier segment of the market, which includes both imported and craft beers. Its Corona brand is a powerhouse franchise that -- along with Modelo and Pacifico -- helped the company account for most of the growth in the industry last year. Shipment volume for its beers rose 6% in the most recent complete fiscal year, compared to AB InBev's 1% uptick.
The focus on higher-price offerings could also potentially lead to more stable earnings for Constellation Brands. Operating profit margin is a helpful trend to watch on this score. AB InBev competes across the value spectrum and enjoys strong profitability thanks to its massive size, but its operating margin has come under pressure recently. By contrast, Constellation Brands' operating margin recently crossed 30% of sales, making it the industry leader at the moment. And, with margins rising in its newly transformed wine and spirits division, the company has a good shot at further padding its lead.
Constellation Brands Operating Margin (TTM), data by YCharts.
Innovation and capital allocation
The past few years have demonstrated that consumers aren't particularly attached to established beer brands. They're also willing to pay more for premium products.
Apart from Boston Beer, which has achieved sharp growth in recent years thanks to its hard tea, hard cider, and hard seltzer releases, Constellation Brands is a leader in its ability to consistently crank out popular beverage innovations. The company has pioneered new packaging, sizing, and flavors that have supported sales growth at supermarket chains and convenience stores in recent quarters. Its just-released Corona hard seltzer, meanwhile, quickly established itself as a top-five brand within that surging beverage niche.
Finally, Constellation Brands' management team has a strong track record of making shareholder-friendly capital moves. That streak started with its game-changing $4.75 billion purchase of the Mexican beer brands from AB InBev back in 2013 and has continued into 2020 with bets on other premium beer, wine, and spirits brands.
The biggest question mark here is Constellation Brands' huge investment in Canopy Growth, which is seeking to establish an early lead in the consumer marijuana space. Sure, there's no guarantee that governments will legalize cannabis in the U.S. and elsewhere any time soon. But Constellation's management is as bullish as it has ever been on the global potential for cannabis-infused alcoholic drinks, and its exposure to this long-term trend is just another good reason to prefer its stock over AB InBev today.
