Big Beer: How Does SABMiller Stack Up?

| About: SABMiller plc (SBMRY)

After two years of flat trading, "Big Beer" stocks have enjoyed a raucous keg party since the first quarter. Anheuser-Busch InBev (NYSE:BUD) and Heineken (OTCQX:HEINY) are both up around 20% since the beginning of February, but the real standout has been SABMiller (OTCPK:SBMRY): up more than 30%. The S&P 500 is up about 10% over the same period.

After the recent run-up - which has not been accompanied by a proportionate surge in earnings - all three megabrewers now fetch relatively high earnings multiples: AB InBev, Heineken and SABMiller trade for 19 times, 18 times and 22 times forward earnings, respectively.

Of course, when you consider that the S&P 500 trades for 20 times earnings, those valuations look a lot more reasonable. Outside of an elite handful of companies - think Coca-Cola (NYSE:KO) or Disney (NYSE:DIS) - big beer names have the most recognizable brands in the world. With branding power comes premium pricing and higher returns on equity. Add to this financial strength and the recession-resistant nature of beer demand, and you have a recipe for a premium stock valuation. All else equal, the Big 3 megabrewers should trade at a significant premium to the S&P 500.

But the single biggest reason why I love Big Beer as a long-term holding is its prime placement in the developing world. Big Beer went on a two-decade acquisition spree that left each of the Big 3 with outsized exposure to emerging markets. This explains why beer stocks got hit particularly hard in January, when it looked as if the emerging markets might be heading for a currency crisis, and why they have rallied hard in the months that followed. As investors have regained confidence in emerging markets, they've regained confidence in Big Beer.

How does this shake out geographically? Let's take a look. AB InBev gets about 52% of its earnings from Latin America, including Mexico. North America takes another 38%, and Europe and Asia make up most of the remainder. AB InBev has very little presence in Africa. While we think of BUD as an American company, it's actually a Latin American company, with its headquarters across the Atlantic in Belgium.

Heineken breaks out its numbers a little differently. "The Americas," which lumps the United States and Canada in with developing Latin America, accounts for about 26% of profits. "Asia-Pacific" accounts for about 18% of profits. Western and Central/Eastern Europe bring in 27% and 10% of profits, respectively. But the real story is its exposure to fast-growing Africa: the Africa/Mideast region accounts for 21% of profits, a proportion I expect to see massively grow in the years ahead. (Figures add up to more than 100% due to rounding and adjustments; all data from Heineken 2013 Annual Report.)

But if I like Heineken's geographic mix, I love SABMiller's. SABMiller has the highest exposure of the three to Africa. SABMiller's African operations are responsible for 31% of profits, about 17% of which is from South Africa. But not to be neglected, SABMiller also gets 33% of its profits from Latin America, 13% from Asia-Pacific and 11% and 12% from Europe and North America, respectively.

Why am I so bullish on Africa's prospects? Because frankly, it is it the last real investment frontier. Per capita GDP has more than doubled in the past decade, and according to Deloitte, 7 of the 10 fastest-growing countries in the world are in Africa. As African living standards rise, so do the standards of African drinkers.

What is most attractive about a frontier market like Africa is that the competition is not other beer brands; it's home brew. Only about 20% of the beer consumed in Africa is branded or bottled. The remaining 80% is brewed at home or by small commercial establishments.

I'm not talking about trendy craft brews here; I'm talking about moonshine. As incomes continue to rise in Africa, so will the consumption of bottled beer.

So, what does all of this mean for SABMiller's stock?

I wouldn't expect a repeat of the 30% returns enjoyed over the past five months. And for that matter, I'm not expecting much from the broader market either, given today's prices.

But I would highly recommend picking up shares of SABMiller on any pullbacks. Among Western multinationals, SABMiller is uniquely well-positioned to profit from the rise of Africa's middle classes. This is one of the most powerful macro trends of the next decade, and you want your portfolio to be on the right side of it.

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