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Anheuser-Busch Is Shaking Up the Beer Industry

By Tyler Lacoma – Mar 12, 2014 at 10:36AM

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A forecast slowdown for the beer giant could brew up big changes.

Source: Flickr user Cambridge Brewing

Anheuser-Busch InBev (BUD 0.51%) is in a tricky spot. With beer sales in the U.S. and Brazil falling, and Bloomberg reports forecasting a slow 10 years for the giant beer maker, the company is considering redirection. When such a dominant industry leader makes a move, the ripples are felt across the market -- and A-B InBev's moves could prove very interesting for investors.

Shares rose toward the end of February on the news that A-B InBev was taking measures to restore profits and that it expected higher sales in Brazil thanks to the World Cup. After a sharp dip below $70 in January, this good news helped the stock price hold at around $75, where it has been hovering since last year's late summer recovery.

Investors were encouraged to hear that the beer giant was raising prices in Mexico, where it bought the maker of Corona, Grupo Modelo SAB, back in 2012. Long-term measures remain unknown but could include new acquisitions and a focus on other countries, which means new opportunities for domestic companies. The next moves by A-B InBev could create long-awaited room for other public beer companies in the U.S.

Betting on acquisitions
A-B InBev is an acquisitive company, to the tune of $91 billion in the last 10 years. This preferred method of expansion could again prove to be the go-to strategy for the company, and a likely target is SABMiller (NASDAQOTH: SBMRY), worth around $79 billion. Analysts have considered this dance before. But previously A-B InBev and SABMiller were both pursuing other deals and were simply too large, making a deal difficult. But the latest forecasts could push a merger at last. Although the InBev and A-B deal reached $61 billion back in 2008, this new acquisition could finally outdo that figure.

Estimates show that the resulting beer giant would control around half the beer profits in the world. The infusion of SABMiller profits could also end A-B InBev's slowdown abruptly, allowing for a new phase of high growth. Currently SABMiller is in a more dynamic place than its rival. The company received an upgrade by RBC Capital on March 4 and moved from underperform to sector perform. Goldman Sachs also upgraded SABMiller back in February. SABMiller shares are currently at nearly $50 and are on the rise thanks to the good news. Perhaps A-B InBev will want some of this good news for itself.

However, keep an eye on A-B InBev's activity in other countries as well. The simple, cheap beers like Budweiser, Corona, and Stella Artois that A-B InBev markets could have appeal in plenty of new international markets. Africa and South Korea are two big possibilities, with plenty of room for new sales and potentially new products.

Room for more growth
If A-B InBev does consider new acquisitions, it will need to hurdle over a few monopoly laws to get there; this means dropping some divisions. The most likely divestment location is the United States, where sales are low and regulations strict. This could offer fuel for smaller U.S. brewers and give the industry room to breathe. Two sectors stand to benefit.

First, smaller public companies could make new acquisitions of their own and enter -- or extend -- growth phases. Boston Beer (SAM 0.49%) falls in the latter category. The beer maker (owner of Samuel Adams and others) reported fourth-quarter net revenue of $205.4 million, a 34% jump year over year, and saw shipment figures rise by 29%. The company is picking up new analysts from the likes of the Tigress Financial firm, which started covering the brewery in early March and gave it a buy rating out the gate.

Right now Boston Beer is trading a little low, at around $236, since it missed its latest earnings-per-share consensus estimate of $1.51 by $0.18. But there is still plenty of room for potential growth, especially if A-B InBev moves aside.

Second, an A-B InBev divestment could encourage more growth in the domestic craft beer market. With more than 2,500 craft breweries in the United States and another 1,500 on the way, plus double-digit growth rates for the past four years, craft beer has proven it is far more than a bubble.

Craft beer currently possesses 7% of the total beer market. Production of mass-produced beers, however, continues to fall, with losses of 2.4% in 2013 compared to volume growth of 10% for craft products in the same year; so expect that market share to grow. This means the market may be able to support exciting new beer IPOs this year, especially if A-B InBev moves its focus to other countries.

Tyler Lacoma has no position in any stocks mentioned. The Motley Fool recommends Boston Beer. The Motley Fool owns shares of Boston Beer. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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