Beer is one of those global items that everyone seems to understand and appreciate. But how profitable are the companies that comprise the sector? While there are over 2,000 brewing companies, there are less than 20 publicly traded companies that specialize in beer. The beer-brewing sector is truly international, representing China, Japan, Mexico, Belgium, England, Chile, the Netherlands, Denmark and the United States.
The brewing sector had solid gains in revenue in 2012, despite a Brewbound report that three years of volume decline are continuing into 2013. These losses are blamed on poor weather and consumer shifts to wine, spirits, and craft beers. SABMiller (OTCPK:SBMRY) reports that the growth engine in beer consumption is the developing markets of Africa, Asia, and Latin America, whose incomes are growing and tastes are changing. Also, in June of this year, Grupo Modelo (OTC:GPMCY) sold its US business to Constellation Brands and combined its global business with Anheuser-Busch InBev (NYSE:BUD).
The Top Six
The beer brewing stars are listed below in order of overall performance. Only one domestic company made the list of top 6 performers.
The six companies listed represent the best performance across all three areas: Financial (F), Resources (R), and Market (M). Applying FiRM analysis to the 13 companies in the sector gives a more thorough look at fundamental and operational efficiencies as well as their management of the Big Four resources: Energy, Water, GHG emissions and Waste.
Net growth in the beer-brewing sector is a staggering 70%, which is a skewed value because of the tremendous 754% increase in net income of Kirin Holdings Company, Ltd (OTCPK:KNBWY). To arrive at the more normalized figure of 13%, the net growth average has been recalculated excluding Kirin Holding Company's total. Analyzing overall financial performance, the beer-brewing sector shows a relatively solid net income and margin, but operational efficiency varies widely from company to company, regardless of size. The second highest net income producer, Heineken NV (HINKY), enjoyed a 106% increase in net income over 2011, partially resulting from a lean 32% cost of sales. Three of the beer companies actually experienced negative net income growth.
Earnings ratios also varied widely, with about half of the companies in each KPI coming in under the sector average. Boston Beer Company (NYSE:SAM) was the overall top performer with fundamentals, including the highest ROA at 18% (sector average a paltry 6.5%) and a P/E Ratio of 49.13, well above the sector average of 20.09. The P/E Ratio of Craft Brew Alliance (NASDAQ:BREW), at 644.06 skewed the overall total and was excluded from the averaging calculation.
Brewing beer requires large volumes of agricultural commodities, which means that weather extremes can cause fluctuations in operational costs. In 2012, the Midwestern drought impacted wheat, corn, and barley, all of which saw pricing volatility. The other main resource required for brewing is water, not only for the beer itself, but also for processing, cleaning, and operations. The beer-brewing sector is very savvy about their own water use and many of the breweries use inventive methods to reuse and reclaim the vast volumes of water used to produce beer.
In the brewing sector, water use is reported in terms of hectoliters of water used to produce a hectoliter of beer. The winner in this category was Carlsberg A/S (OTCPK:CABGY), reporting a lean 3.3 hectoliter used per hectoliter produced. MolsonCoors (NYSE:TAP) dropped their already very efficient water volume a whopping 28% over last year. Kirin Holdings uses just over 3 billion gallons of water to produce their beer, a full 10 billion gallons under the average water used by all of the brewers. Tsingtao Brewery Co (OTCPK:TSGTY) ranks highest in resource efficiency because they were successful at lowering their resource use across the Big Four categories.
Beer brewing produces an average of 2.2 million tons of waste annually, mostly in the form of spent grains. Compania Cervecerias Unidas (NYSE:CCU), MolsonCoors and Grupo Modelo all produce significantly less waste than their brewing counterparts and seven of the companies reported a minimum recycle/reuse rate of over 95% for all waste produced. Most of that spent grain goes to local farms for livestock feed.
The brewing sector average stock price grew 31% over 2012. The two smaller brewing companies enjoying the most stock price growth are Craft Brew Alliance rising 121% and Boston Beer Company soaring 132% over October 2012 prices. The next closest performer is Tsingtao Brewery Co with a 42% price increase. The executive panel at the 2013 National Beer Wholesaler's Convention expressed concern that beer volume and sales are decreasing, which is based on three years of decline prior to 2012. The current price performance is not aligned with the sales volume concern expressed by many larger beer brewing company executives.
The sector enjoys a stable RSI of 57.63, with all but one company landing in the mid RSI range. Craft Brew Alliance, with an RSI of 78.5 is slightly overbought, which could be attributed to the tremendous price increase over the past year.
The beer-brewing sector is experiencing a transition as consumer tastes evolve into a greater availability of spirits and higher-end craft brews. Consolidation of brands and expansion into emerging markets are two ways the industry is seeking to stay profitable. Prospects in this sector are good for long-term growth, particularly for companies that continue to expand their offerings and their market reach and manage their commodities costs.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.