The popularity of hard alcohol is on a 13-year run higher, and in 2022, the market share of spirits among consumers surpassed that of beer for the first time ever. Driven by growing demand for tequila and American whiskey, liquor's market share hit 42.1% last year, narrowly eclipsing the 41.9% share held by beer, according to the Distilled Spirits Council of the United States.
Yet, the reversal of fortune for beer stocks has been brewing for at least a decade as beer sales declined sharply over that time. Top brewers like Anheuser-Busch In Bev (BUD +0.46%) and Boston Beer (SAM +0.23%) were forced to branch out into new categories, including hard seltzer, hard tea, hard coffee, and even kombucha to try to make up the difference.
Image source: Getty Images.
The craft beer industry trade group Brewers Association changed the definition of what constitutes a craft brewer to say a brewer just needed to make some beer to continue calling itself one. The change was needed because Boston Beer, long the face of the craft beer industry, was about to no longer qualify as it was making more seltzer and tea than actual beer.
Molson Coors (TAP +0.95%) even abandoned the word "brewing" in its official name, changing it to the more generic and encompassing "Molson Coors Beverage Company."
With beer's popularity still on the wane and that of hard liquor rising, investing in brewers may not seem like a good bet. But for patient investors, there's one that just might be worth the effort.
NYSE: TAP
Key Data Points
There's a tear in my beer
A large portion of the industry's sales aren't even in beer anymore, or at least not what consumers think of as beer. Hard seltzer now accounts for 7.4% of total beer volume and 9.5% of dollar sales, and that's after a tough year for the drink (because seltzer is a flavored malt beverage, it is categorized as "beer" and not spirits or wine).
Craft beer, which was once the industry's growth engine, today represents only 9% of volume, and just under 13% of dollar sales.
Boston Beer Chairman Jim Koch told his wholesalers last year that traditional beer may never grow again in our lifetimes in the U.S., to which Molson CEO Gavin Hattersley retorted that it's "what you would expect to hear from the leader of the business that has only got about 10% of their portfolio in beer."
It's clear the industry is still going through tough times, but there's one brewer that stands out among the rest in terms of valuation and potential.
Image source: Getty Images.
A rebound worth toasting
Molson Coors is a brewer -- er, beverage company -- in the midst of a turnaround. Launched in 2019, the revitalization plan is starting to gain traction.
The brewer grew both top- and bottom-line results in the third quarter on a constant-currency basis, which it has done for four out of the last seven quarters, while increasing sales and profits on an underlying basis as well (an underlying basis typically accounts for acquisitions and divestitures, currency fluctuations, and distributor inventory adjustments).
Hattersley points out Molson has seen six straight quarters of net sales revenue growth, with expanding sales in the Americas and elsewhere around the world, resulting in global net revenue above the 2019 baseline. Importantly, Molson's third-quarter trend for sales to retailers (STR) was the best it has seen in over a decade.
The brewer also initiated historic price increases of 10% in the U.S., far above the usual 1% to 2% hikes, to offset the impact of its own rising costs. So while Molson ended up narrowing its full-year outlook to the lower end of its guidance as a result, it is still expecting the long-term trend to keep growing.
Premium pricing in beer
Because the jury is still out on the turnaround, the market has significantly discounted Molson's stock, especially compared to those of its peers.
|
Brewer |
Price-to-Earnings |
Fwd P/E |
Price-to-Sales |
Price-to-Free Cash Flow |
|---|---|---|---|---|
|
Molson Coors |
22.7 |
12.6 |
1.0 |
25.4 |
|
Anheuser-Busch InBev |
23.9 |
17.9 |
1.8 |
n/a |
|
Boston Beer |
178.7 |
35.0 |
2.4 |
53.5 |
|
Constellation Brands |
667.9 |
19.4 |
4.3 |
48.9 |
|
Heineken |
14.7 |
17.3 |
2.1 |
24.9 |
Data source: FinViz.com, Yahoo Finance. Table by author.
Molson has been able to benefit from the premiumization trends that have occurred across virtually all alcohol markets, allowing its beers to maintain their market share, with Coors Light, Miller Lite and Coors Banquet adding a full share point each in the premium category.
There have certainly been missteps over the years, such as Molson's bet on the marijuana industry in 2018, which saw it form a joint venture with Canada's Hexo that hasn't amounted to anything as the promised green revolution never materialized.
There are also positives, too, such as its own popular seltzer brand Topo Chico, which it has expanded and even partnered with Coca-Cola to build up further. It even tapped the spirits market with its own whiskey.
Go with the cheap beer
Shares of Molson Coors are essentially flat so far this year, up 4% over the past year, and remain 53% below their all-time high in 2016. There is a lot of ground for the brewer to recover, but the alcohol stock's turnaround plan has been sensibly introduced and is beginning to pay off.
Adding in a dividend that yields 2.9% annually, and Molson Coors could pay off well for investors willing to wait.
