Let’s say you walk into a local bar after work and sit down for a refreshing beer. Then you notice that one of your favorite beers, the Sam Adams Cold Snap, is listed for $10.
Since it’s beer we’re talking about, not a 12-year-old Scotch, you look for other options. It turns out that Kirin Ichiban, which is also a very good beer, is on sale for $1. That’s a bargain, so you buy one.
You just demonstrated a basic economic principle – the law of demand. As prices rise, consumers’ demand for a product or service declines, due in part to the substitution effect.
However, the financial markets work in a very different manner…
You see, investors seem to like stocks better when they become more expensive. In economics, this is known as a “Giffen good.”
Luckily, human psychology and crowd behavior create an opportunity to profit from being rational and taking a perspective different than that of the masses. In other words, those who are willing to take an objective look at a stock’s value, and not be biased by its popularity, are rewarded over time.
Beer stocks are popular nowadays because their underlying businesses are stable and they pay solid dividends. Like many companies in the consumer staples sector, beer stocks have become coveted, driving up their valuations.
But let’s see if we can find any value among the brewers that ferment these wonderful libations…
Brewing Industry
When I think of beer stocks, Anheuser-Busch InBev (NYSE:BUD) immediately comes to mind. This behemoth was formed with the merger of Anheuser-Busch and InBev in 2008, and is now domiciled in Belgium. The shares that trade under the BUD ticker are American depositary receipts (ADRs).
With a $175-billion market cap and a solid 2.1% dividend yield (net of foreign withholding taxes), the stock certainly appears to live up to the company’s “King of Beers” slogan. However, it also seems to be fairly expensive, based on its 3.8x price-to-sales ratio. In contrast, the median P/S ratio of S&P 500 constituents is 2.1x.
And although AB InBev has a 21% market share of global beer sales, its iconic Budweiser and Bud Light brands aren’t the best-selling beers in the world. Instead, Snow has become the world’s most popular beer, due to rising beer consumption in China. Snow is produced by CR Snow, a joint venture between China Resource Enterprises and SABMiller plc (OTC:SBMRF). It certainly seems like popular beers and popular stocks go hand in hand, as SABMiller trades with a lofty 5.1x price-to-sales ratio.
Another investor favorite, Boston Beer (NYSE:SAM), has benefited from the craft beer craze. The company is growing revenue very quickly, but it’s also the most expensive on the list, based on enterprise value-to-EBITDA. SAM is a glamour stock that not only doesn’t pay a dividend, but it’s also diluted shareholders with a 1.8% increase in its shares outstanding over the past year.
Similarly, Carlsberg A/S (OTC: CABGY) and Heineken NV (OTC: HEINY) both have uninspiring total yields (dividend yield plus net buyback percentage). Molson Coors (NYSE:TAP), on the other hand, has a nice total yield, but its P/S and EV/EBITDA are elevated.
In short, there’s not much to like on this list. However, there is a Japanese brewer that warrants our attention…
Fermenting Value
Kirin Holdings (Kirin Holdings (OTC:KNBWF) is predominantly a beer maker, but also produces spirits, soft drinks, food products, and pharmaceuticals. With a P/S ratio of just 0.6x and an EV/EBITDA of 8.2x, Kirin is by far the cheapest global brewer. It also has the highest total yield of the bunch.
In addition, Kirin has a major macro tailwind… “Abenomics” is a certified failure. Japanese GDP contracted at an annualized 6.8% rate in the second quarter, due to the consumption tax increase that took effect April 1. Japan’s so-called “misery index” (inflation rate plus unemployment rate) recently hit a 33-year high. I think the Japanese will be drowning a lot of sorrows with beer over the coming years.
Buy Kirin. It’s a great beer and a cheap stock.
Safe (and high-yield) investing!