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How Can Alcohol Destroy Your Portfolio?

By Mark Reeth – Updated Apr 7, 2017 at 1:18PM

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One big booze maker that will have you crying into your beer.

It's a big world out there, full of companies that are looking to get bigger. That's why I'm continuing my periodic look at recent buyouts and acquisitions to review all the deals and steals you need to know about. This week is a special two-part booze-buyout edition, focusing on the third-largest brewer in the world: Heineken (NasdaqOTH: HINKY.PK).

Booze blues
Heineken's earnings report two weeks ago was a bit of a mixed drink. The company's six-month net profit increased about 33% to $976 million, which investors can't complain about. However, Heineken also mentioned that profit would've fallen about 5% if not for the sale of a brewery in the Dominican Republic last year that offset the losses. The decline in sales would've been due to the slowdown in European beer sales, which is why the company is so focused on expanding into emerging markets.

Heineken's main target is the Asia-Pacific region, and to this end it has endeavored to buy out Asia Pacific Breweries. APB is a well-known and well-liked brand in the region, which is why Heineken already has a 43% stake in the company. Heineken has been in negotiations with the other major APB shareholder, joint venture partner Fraser & Neave (which holds 39.7% of APB). Unfortunately, it hasn't all been pina coladas and getting caught in the rain for Heineken's deal.

Earlier this month, a rival brewer, Thai Beverage (which already owns 8% of APB) made its own offer for 7.3% of Fraser & Neave's stake in APB. While this may be a small amount, it's enough to cause trouble for Heineken's proposed buyout. That's why Heineken has since countered by increasing its offer to Fraser & Neave, but as of the company's earnings report last week, there's no word on whether the offer has been accepted.

If Heineken's new deal is rejected, one of two things will happen. Either Heineken will increase its offer even more, which will hurt the company's bottom line, or the offer won't be accepted at all. In that second scenario, Heineken investors may want to head to the nearest pub and cry into their drinks, because there's not going to be a better way to gain a strong hold of a great growth market anytime soon.

Light weight
There's a lot at stake with Heineken's APB deal. But putting that aside for now, how does the company stack up financially against its major competitors?

Company

P/E

Gross Margin

Operating Margin

Quarterly Revenue Growth

Dividend Yield

Heineken 16.35 37% 13% 5% N/A
Anheuser-Busch (NYSE: BUD) 19.13 58% 32% (1%) 1.60%
Diageo (NYSE: DEO) 26.18 60% 27% 8% 3.10%
Constellation Brands (NYSE: STZ) 15.21 40% 21% 0% N/A

Sources: Yahoo! Finance and Fool.com.

Obviously, you'd be better off sticking with the financially solid Anheuser-Busch or the fast-growing Diageo if you really want to get into this industry. Even Constellation Brands has better margins and a lower price tag, making it a potential buy as well. When you compare Heineken's financials to those of its competitors, it becomes clear that this is one alcohol stock you don't want to put on your tab.

If you never thought that alcohol was such a dynamic industry, you aren't alone; there are entire sectors out there that Wall Street doesn't pay attention to. But the Fool pays attention to those stocks, and we'd like to show you what we found in our special free report aptly named "3 Stock's Wall Street's Too Rich to Notice." These are stocks that you know and love, so don't hesitate to get your special free report right here.

Motley Fool contributor Mark Reeth has no positions in the stocks above, but he loves Johnnie Walker. Follow him @ChristmasReeth.

Motley Fool newsletter services have recommended buying shares of Diageo. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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Stocks Mentioned

Anheuser-Busch InBev SA/NV Stock Quote
Anheuser-Busch InBev SA/NV
BUD
$45.16 (-0.62%) $0.28
Diageo plc Stock Quote
Diageo plc
DEO
$169.81 (-0.08%) $0.13
Constellation Brands, Inc. Stock Quote
Constellation Brands, Inc.
STZ
$229.68 (-1.71%) $-3.99

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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