Beverages - Alcohol Industry Trends Suggest Growth in the Future

Companies producing, importing, exporting, marketing and selling alcoholic beverages like beer, craft beer, draft beer, ciders, wine, rums, whiskey, liqueurs, vodka, tequila, champagnes, brandy, amaretto, ready-to-drink cocktails, malt and other spirits, mainly constitute the Zacks Beverages – Alcohol industry. However, some of industry players also engage in production and sale of non-alcoholic beverages including carbonated soft drinks, sparkling waters, bottled water, energy drinks, powdered and natural juices, and ready-to-drink teas.

These companies, mostly the brewers (beer makers), sell products through a network of wholesalers, as well as to retailers like supermarkets, warehouse clubs, grocery stores, convenience stores, package stores, drug stores and other retail outlets. These also sell beer directly to consumers in cans and bottles at restaurants, pubs, bars and liquor stores. Additionally, some brewers operate brewpubs or taste rooms at its breweries engaging consumers in the freshest beers.

Here are the industry’s three major themes:

• Beer brands in the United States continue to struggle from industry-wide softening beer shipment volumes. This is mainly due to increasing health consciousness among consumers and strong competition from other alcohol beverages. Consumers are now drinking less, emphasizing quality drinks. With growing importance of premiumization, premium and super-premium beer varieties are witnessing growth. Additionally, health-conscious consumers are turning to low-and-no-alcohol varieties, which have given wine greater prominence of late. Consequently, beer makers are concentrating on introducing flavored varieties with low-alcohol content, alongside diversifying to non-alcoholic beverages and energy drinks. This is good news for premium and craft beer segments, which are gaining attention.
   
• As already mentioned, the soft beer market trend has been beneficial for premium, craft beverages as well as innovative spirits’ variations. Consequently, customary drinks like mead, ginger beer and gin are witnessing revived growth. Meanwhile, the industry trends for innovations like frozen alcohol slushies, tequilas, martinis, cocktails, wine pops and hard seltzers are favorable.  Another key trend that is driving the alcoholic beverage market is cannabis-infused beverages. Alcoholic beverage makers are exploring the cannabis segment to recover lost sales as the beer market has taken a hit. Notably, alcohol companies including Constellation Brands, Molson Coors (TAP) and Heineken (HEINY) have expanded in the Canadian marijuana space to develop cannabis-infused drinks. Further, Anheuser-Busch partnered with Tilray (TLRY) to conduct joint research on non-alcoholic, cannabis-infused beverages.
   
• A headwind facing the industry is higher input costs, particularly due to increased tariffs on aluminum (which have raised packaging costs) and higher freight costs. These along with higher advertising and promotional expenses as well as increased SG&A costs are weighing on margins. Additionally, some companies in the space are experiencing the negative effects of increased tariffs on exports of spirits (due to the U.S.-China trade war), which is beginning to hurt top and bottom lines.

Zacks Industry Rank Reflects Favorable Trends

The Zacks Beverages – Alcohol industry, which is housed within the broader Zacks Consumer Staples sector, currently carries a Zacks Industry Rank #100. This rank places it at the top 39% 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 bright 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 top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. The industry’s earnings estimate for the current year has moved up nearly 1.9% year to date.

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

Industry Lags in Terms of Shareholder Returns

The Zacks Beverages – Alcohol industry has underperformed both the S&P 500 and its own sector over the past year.

The stocks in this industry collectively slumped 8.9%, against the Zacks S&P 500 composite’s growth of 3.3% and the Zacks Consumer Staples sector’s increase of 4.7% over this period.

One-Year Price Performance

Beverages – Alcohol Industry’s Valuation

On the basis of forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing Consumer Staples stocks, the industry is currently trading at 21.69X compared with the S&P 500’s 16.58X and the sector’s 18.85X.

Over the last five years, the industry has traded as high as 27.48X, as low as 18.89X, and at the median of 22.70X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)