By Martin Hutchinson
Director of Global Investing Research
SAB Miller PLC (SBMRY) and Molson Coors Brewing Co. (TAP) agreed on Tuesday to merge their U.S. brewing operations, creating a worthy rival for Anheuser-Busch Cos. Inc. (BUD). The deal also highlights the fact that – pretty well throughout the world (well, may be not in Moslem countries) – beer is one whale of a business: After all, SAB got to be big enough to merge with Miller from a base in South Africa, not one of the world’s wealthier markets.
I thought it might be interesting to look at the eight foreign beer companies that have ADRs outstanding, which a U.S. investor might buy, perhaps making a pick or two as to which has the thirstiest and fastest growing base of consumers, and that’s also selling at a reasonable price.
Generally, once the plant itself has been paid for, a brewery that has a dominant position in a local market is essentially a license to print money – indeed, several breweries have been used as the nexus for major local conglomerates, because of their reliable cash flow. On the other hand, there are limits to economies of scale – there are no brewing equivalents of General Motors Corp. (GM) or Microsoft Corp. (MSFT).
To get revenue and earnings growth, population growth is important. But so is “emergence:” While beer sales increase slowly in a wealthy market like the United States or Holland, they may grow much more rapidly in countries like India and China, in which a new middle class is emerging.
The first of the foreign brewers, alphabetically, is Compania Cervecerias Unidas SA (CU) of Chile. CU produces and distributes beer in Chile and Argentina, having its own flagship brand, Cristal, as well as distributing Heineken and several other international brands. However, with sales of $1.1 billion it appears limited to those two markets, which have a combined population of only 56 million people. If I was more bullish on the economic and political prospects of Argentina and Chile, I would be more bullish on CU, but with a Price/Earnings ratio of 20 and a PEG (Price/Earnings to Growth Rate) ratio of 2.1, it seems fully valued.
Companhia de Bebidas das Americas (AMBEV) (ABV), is Brazil’s largest brewer, operating in 14 Latin American countries. It’s also active in soft drinks, bottling and distributing Pepsi Cola outside the U.S. market. It’s a much larger company than CU – as you’d expect, since Brazil has a population of 190 million – has sales of $10.3 billion, and has more room to grow given its presence in Latin America’s middle-income emerging markets. Unfortunately, it’s very high-priced, with a P/E of 32 and a PEG of 2.4. A pity – beer companies do especially well in countries with hot climates!
Foster’s Group Ltd. (FBRWY.PK) is the leading alcohol company in Australia and the Pacific region, alas only quoted on the Pink Sheets. As well as beer, it has a substantial wine operation. And as most folks know, being aware of the brand, Foster’s Lager has good market penetration across the English-speaking world.
With sales of $4 billion, it has a P/E of 17 and has recently been growing around 12% per annum, giving it a PEG ratio of 1.4. Its market capitalization is $13 billion, so there’s plenty of liquidity internationally, preventing a “pink sheet” investment from getting out of line with its underlying value.
Heineken NV (HINKY.PK) of the Netherlands is a gigantic company, so why it’s too cheap to list itself properly – and not just on “Pink Sheets” – I don’t know. It claims to be the world’s most valuable beer brand, and is distributed worldwide. Heineken has a market capitalization of $14 billion and a P/E ratio of 18, but is only growing at about 6%, albeit in euros, which gives you an additional kicker when the dollar is weak, as it is now. Since its home EU market is huge, but relatively slow growing, I would generally recommend Foster’s instead.
Kirin Holdings Co. Ltd. (KNBWY.PK) is the largest brewer in Japan, again listed only on the Pink Sheets. It has operations across East Asia, but is growing relatively slowly at about 6%, since its home market has slow population growth and is already rich. It has a market capitalization of $13 billion, and a P/E ratio of 27 – relatively high, as is typical of Japanese companies. However, since the yen looks likely to be strong and it does not export heavily from Japan, it may be worthwhile as a currency play.
SABMiller PLC (SBMRY.PK) is listed only on the pink sheets, in spite of owning Miller Brewing Co. It’s now a British company, with important operations in the United States, Eastern Europe, and all across Africa, particularly in South Africa. At $45 billion, its market capitalization is much larger than its competitors, but its P/E ratio is at a nose-bleed-high of 27. While there are prospects for long-term growth in Eastern Europe and Africa, the U.S. beer market looks pretty mature, so you’re paying 27 times earnings for its ability to do merger and acquisition deals. Maybe not.
San Miguel Corp (SMGBY.PK) is the largest brewer in the Philippines (population 91 million, growing at 1.8%, emerging market, hot climate) and also has beverage and packaging businesses, with operations throughout Southeast Asia. Beer represents 25% of sales and 49% of operating income. It has a market capitalization of only $4 billion, so with only a pink-sheet listing, it may be somewhat illiquid. However, with sales of $5.7 billion and a P/E ratio of about 16, it seems to be quite a good value, provided you’re prepared to live with the Philippine country risk and the dangers of its two-tier share structure, which might produce a conflict of interest between its controlling shareholders and outside investors.
Tsingtao Brewery Ltd., (TSGTY.PK) is China’s largest domestic brewer, and the best known internationally. It has sales of $800 million and a market capitalization of $5 billion on Hong Kong (its A shares in Shanghai are quoted at double the price of its Hong Kong H shares). Regrettably, even the H shares have a P/E ratio of 60. Despite the allure of 1.3 billion thirsty Chinese, and even though the share price is up 178% in the last year, the stock seems a bit rich.
However, Anheuser-Busch (BUD) owns 27% of Tsingtao and is on a P/E ratio of 20, so you may prefer to invest in it by that means.
In summary, beer companies are generally highly valued in today’s market. That’s not surprising: Their steady cash flow and recession-proof operations make them valuable properties, especially if their market has reasonable growth prospects. However at multiples of 25, 32 or even 60, they are overpriced. I would recommend the two companies with reasonable multiples and good growth prospects: Fosters and (more hesitantly, because of its home) San Miguel.