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5 Stocks in Focus as Alcohol Industry Faces Inflation Wrath

Players in the Zacks Beverages – Alcohol industry have been facing hardships due to inflation, and higher commodity and logistic costs. The industry participants have been keen on spending on advertising and marketing, which has resulted in higher operational costs. These elevated costs are likely to persist and may hurt the margins of the alcohol makers.

However, companies in the alcohol space are poised to benefit from the momentum in spirits and ready-to-drink (RTD) cocktails. The strong demand for premium and high-quality products, and innovative spirits have been driving growth. The diversification of product portfolios of alcohol companies has been helping boost their top lines. Investments in product innovations, premiumization and technology platforms bode well for players like AnheuserBusch InBev BUD, Diageo Plc DEO, Constellation Brands Inc. STZ, Molson Coors TAP and The Boston Beer Company Inc. SAM.

About the Industry

The Zacks Beverages – Alcohol industry mainly comprises producers, importers, exporters, marketers and sellers of alcoholic beverages like beer, craft beer, ciders, wine, rum, whiskey, liqueurs, vodka, tequila, champagnes, brandy, amaretto, RTD cocktails and malt. Some industry players also produce and sell non-alcoholic beverages like carbonated soft drinks, sparkling waters, bottled water, energy drinks, powdered and natural juices, and RTD teas. The companies sell products through wholesalers and retailers like supermarkets, warehouse clubs, grocery stores, convenience stores, package stores, drug stores and other retail outlets. The industry participants also sell beer directly to consumers in cans and bottles at restaurants, pubs, bars and liquor stores. Some brewers operate brewpubs or taste rooms at breweries, offering consumers the freshest beer.

What's Shaping the Future of Beverages - Alcohol Industry

Elevated Costs: Players in the alcohol industry have been enduring pressures from the ongoing impacts of inflationary labor, transportation and commodity costs. The industry players have been experiencing elevated ingredient and other input costs. Fluctuating prices of raw materials, such as grains and fruits, have been the key deterrents. Additionally, elevated expenses for shipping and freight, labor, trucking, fuel, co-packing fees, and secondary packaging materials have been leading to increased costs of sales and higher operating costs. These have been resulting in adverse gross and operating margins for beverage companies.

Apart from elevated input and packaging costs, players in the alcohol industry are anticipated to witness higher advertising and promotional expenses, as well as SG&A costs, further threatening profitability. Rising brand investments, particularly in media, advertising, production and local marketing, and increased freight to distributors due to higher volumes are resulting in elevated advertising, promotional and selling expenses. Growing external costs, increased compensation expenses and higher discretionary spending are expected to drive SG&A deleverage. Most industry players expect the trend to continue in the near term, impacting profitability to some extent.

E-Commerce Development & Pricing Gains: Alcohol companies have been benefiting from the rise of e-commerce, and the recovery across markets and channels, boosting volume. Investments in online and e-commerce portals have gained prominence. Companies have been investing in the latest capabilities, and leveraging technology to better connect with customers and consumers. With a recovery in markets and channels, and the expansion of digital capabilities, players in the alcohol space look well-poised for growth. Additionally, companies have been benefiting from price increases and supply productivity savings, offsetting the effects of cost inflation. Effective marketing and exceptional commercial execution have been boosting sales of alcohol companies.

Premiumization & Product Diversification: Premiumization has been a key growth driver for players in the alcohol space due to consumers’ continued desires for refreshing and newer tastes. Many beverage companies are diversifying their product offerings to capture more sales. Alcohol companies have also been witnessing robust demand trends for premium and high-end products. From the rise of craft spirits to the increasing demand for low-alcohol and non-alcoholic options, the landscape of the alcoholic beverage market is undergoing a notable transformation. As a result, players have been exploring opportunities beyond the traditional beer, whiskey, spirits and wine categories. Some popular variations that have gained traction include RTD spirits like canned wine and cocktails, hard seltzers, cider and flavored malt beverages. To capitalize on the priority and consumer trends, companies have been resorting to innovative products.


Zacks Industry Rank Indicates Dull Prospects

The Zacks Beverages – Alcohol industry is a 17-stock group within the broader Zacks Consumer Staples sector. The industry currently carries a Zacks Industry Rank #137. The rank places it at the bottom 45% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dull near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential.

Before we present a few stocks that you may want to consider for your portfolio, let us take a look at the industry’s recent stock-market performance and valuation picture.

Industry Underperforms S&P 500

The Zacks Beverages – Alcohol industry has underperformed the broader sector and the S&P 500 in the past year.

The stocks in the industry have collectively declined 12.6% in the past year and the Zacks Consumer Staples sector has slipped 3.7%. Meanwhile, the Zacks S&P 500 composite has rallied 24.7%.

One-Year Price Performance

Beverages - Alcohol Industry's Valuation

Based on the forward 12-month price-to-earnings (P/E) ratio, commonly used for valuing Consumer Staples stocks, the industry is currently trading at 16.87X compared with the S&P 500’s 21.16X and the sector’s 17.53X.

Over the last five years, the industry traded as high as 26.79X, as low as 16.87X and at the median of 21.61X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

5 Alcohol Beverages Stocks to Keep a Close Eye on

None of the stocks in the Zacks Beverages – Alcohol space currently sports a Zacks Rank #1 (Strong Buy) and a Zacks Rank #2 (Buy). However, we have selected five stocks with a Zacks Rank #3 (Hold) to watch from the same industry. You can see the complete list of today’s Zacks #1 Rank stocks here.

Let us have a look at the companies.

AnheuserBusch InBev: Also known as AB InBev, it is a global brewing company with more than 500 iconic brands. BUD’s leading position in the majority of its markets and a strong global footprint lend the advantage of economies of scale and growing its multi-country brands globally. AB InBev has been gaining from continued consumer demand for its brand portfolio. Also, strong business momentum, owing to relentless execution, investment in its brands and accelerated digital transformation have been the key drivers. The premiumization of the beer industry has been a significant growth opportunity for BUD.

AB InBev is steadfastly growing its Beyond Beer portfolio, including products like RTD beverages such as canned wine and canned cocktails, hard seltzers, cider, and flavored malt beverages. The company remains focused on expanding its Beyond Beer portfolio, which has also been aiding the top line. The Zacks Consensus Estimate for AB InBev’s 2024 sales and earnings suggests growth of 3.7% and 12.1% from the year-ago period’s reported figure. The consensus mark for the company’s 2024 earnings has moved up 1.5% in the past 30 days. BUD has gained 15% in the past year. The company has a Zacks Rank #3 at present.

Price and Consensus: BUD

Diageo Plc: The largest alcoholic beverage company based in London has been benefiting from endeavors, including premiumization efforts, disciplined cost management, pricing actions and supply productivity savings. DEO remains on track to surpass its three-year productivity savings target of $1.5 billion by the end of fiscal 2024. Robust growth in super-premium-plus brands, particularly scotch, tequila and Chinese white spirits, have been resulting in a positive price/mix.

Diageo expects to invest strongly in marketing and innovation, and leverage its revenue growth management capabilities, including strategic pricing actions. These are expected to position it for solid organic revenue growth in the near term. The company has been relentlessly working to leverage its existing e-commerce capabilities and accelerate investments in the online platform. DEO has declined 18.2% in the past year and currently carries a Zacks Rank #3. The Zacks Consensus Estimate for DEO’s fiscal 2024 sales suggests growth of 11.3% from the year-ago period’s reported figure. The consensus estimate for current-year earnings has been unchanged in the past 30 days and indicates a year-over-year decline of 9.3%.

Price and Consensus: DEO

Constellation Brands: The Victor, NY-based third-largest beer company and a leading, high-end wine company in the United States has been benefiting from the constant focus on brand building and initiatives to include the latest products. STZ is poised to benefit from its premiumization strategy, driven by the continued strength in the Modelo and Corona Brand Family, as well as growth in the Power Brands. The beer segment has been gaining from premiumization, driven by growth in the traditional beer and flavors category, including seltzers, flavored beer, RTD spirits and flavored malt beverages. The company has been making investments to fuel growth of its power brands through innovation, capitalizing on priority and consumer trends, with successful product introductions. STZ is also on track to invest in the next phase of capacity expansion in Mexico.

Constellation Brands’ digital business has been gaining from platforms like Instacart, Drizly and other retailer online sites, as consumers look for the convenience offered by the channels, which is likely to continue. The Zacks Consensus Estimate for STZ’s fiscal 2024 earnings per share has moved down 0.1% in the past seven days. The consensus estimate for fiscal 2024 sales and earnings suggests growth of 8.1% and 12.3%, respectively, from the year-ago period’s reported figures. The STZ stock has gained 2.3% in the past year. It has a Zacks Rank #3 at present.

Price and Consensus: STZ

Molson Coors: The stock of this Chicago, IL-based leading beverage company has declined 12.6% in the past year. TAP is on track with its revitalization plan, focused on achieving sustainable top-line growth by streamlining its organization and reinvesting resources into its brands and capabilities. Investments, partnerships and product launches, which are part of its revitalization plan, have been aiding the company.

Molson Coors has been committed to growing its market share through innovation and premiumization. Intending to accelerate portfolio premiumization, TAP has been aggressively growing its above-premium portfolio in the past few years. The consensus estimate for Molson Coors’ 2024 EPS has moved down by a penny in the past 30 days. The consensus estimate for 2024 sales and earnings suggests growth of 1.1% and 4.6%, respectively, from the year-ago period’s reported figures. TAP currently has a Zacks Rank #3.

Price and Consensus: TAP

Boston Beer: The company is the largest premium craft brewer in the United States and commands a strong portfolio of globally recognized brands. It produces beer, malt beverages and cider products at company-owned breweries and under contract. We expect its continued focus on pricing, product innovation, growth of non-beer categories and brand development to boost its operational performance and position in the market. SAM is on track with growth of its Beyond Beer category. Beyond Beer is growing faster than the traditional beer market, and the company expects this trend to continue for several years.

SAM has been committed to the three-point growth plan focused on the revival of its Samuel Adams and Angry Orchard brands, cost-saving initiatives and long-term innovation. The company is focused on accelerated cost savings and efficiency projects, with savings directed toward brand development. The Zacks Consensus Estimate for Boston Beer’s 2024 sales and earnings suggests growth of 1.9% and 43.9%, respectively, from the year-ago period’s reported figures. The consensus mark for the company’s 2024 earnings has moved down 0.2% in the past seven days. SAM has declined 11.5% in the past year. The company carries a Zacks Rank #3 at present.

Price and Consensus: SAM

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

Anheuser-Busch InBev SA/NV (BUD) : Free Stock Analysis Report

Molson Coors Beverage Company (TAP) : Free Stock Analysis Report

Diageo plc (DEO) : Free Stock Analysis Report

Constellation Brands Inc (STZ) : Free Stock Analysis Report

The Boston Beer Company, Inc. (SAM) : Free Stock Analysis Report

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