Could the drinks binge end in a bad hangover?

published 30 August 2006

It may already seem like a distant memory, but this summer's heatwave, combined with the month-long World Cup coverage, sent consumers on an alcohol binge. Drinkers downed around a billion pints of beer, and the country's 60,000 pubs saw their takings soar. Scottish & Newcastle, the country's largest brewer, was certainly raising a glass after its recent first-half results showed a 12% rise in pre-tax profits, boosted in large part by the UK division. And the good news has kept coming, with Danish brewer Carlsberg raising its guidance for full-year earnings.

But drinkers aren't just queuing up for beer. UK cider consumption is fizzing, having increased by 10% this year alone. Undoubtedly the arrival of Magners on the UK scene has played a large part in this renaissance along with other premium brands, the Irish cider saw a 33% increase in sales last year. But the renewed popularity of the drink can be traced back to 2003, when Scottish & Newcastle bought Bulmers, owner of Strongbow. This was the beginning of the upturn in the drink's fortunes as the brewer positioned the brand as a serious alternative to beer. The result? Scottish & Newcastle's cider range, which also includes the Scrumpy Jack and Woodpecker brands, has enjoyed a 40% leap in sales over the past two years.

Investing in alcohol companies: old favourites

As alcopops such as Smirnoff Ice and Reef continue to lose ground, it's not just cider that is regaining popularity. Old favourite Bacardi rum is staging a comeback too. Aided by the current popularity of rum-based cocktails, such as Ernest Hemingway's favourite, the Mojito, the distiller has come back to the forefront with a sharp rise in sales in recent years. Bacardi is currently owned in trust by various family members, but there are plans to take advantage of the brand's upturn and cash in by means of a private-equity buyout or flotation in New York. And Bacardi isn't the only venerable name rumoured to be considering selling up. Speculation is rife that Indian billionaire Vijay Mallya's United Breweries, owner of the Kingfisher beer brand, plans to gain from the growing popularity of whisky by buying Whyte & Mackay, one of the best-known names in the Scotch industry.

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But now that summer is nearly over (as if anyone needed reminding) and the attractions of iced drinks may be waning, a nasty hangover could be on the cards. Overall, beer consumption has been declining in western Europe in recent years, and with intensifying competition and the smoking ban set to affect England next summer, UK beer brewers have a number of concerns to address. The answer to these seems to mirror the US experience. There, fickle consumers are switching to imported beers and wines and spirits, creating problems for brewer Anheuser-Busch, which has been slow to expand globally. Compare its 80% reliance on the US with rival SABMiller, the second-largest US brewer, which achieves less than a third of its sales there. If the brewing sector is to refresh its fortunes, it is going to have to look east to emerging markets in Russia, China and eastern Europe. Who will achieve the transition most profitably?

We look at three likely winners below.

Investing in alcohol companies: three likely winners

Global brewer SABMiller (SAB, 1,000p) surprised the markets recently with the strength of its results. Although the US was weak, first-quarter lager volumes still rose 7%. The gain was driven by China, one of the biggest growth markets for food and alcohol, where the firm's Snow' beer brand is quickly establishing a foothold. Revenues for Africa and Asia grew at a 19% pace, showing the strength of its products and eastern Europe was also a highlight. The stock is 20% off its May highs and is trading on 15 times Morgan Stanley's estimated 2007 earnings, with a 2.5% yield.

Created by the merger of brewers Interbrew and Ambev in 2004, Inbev (INB.BB e40) sells brands such as Stella Artois and Beck's around the world. It's focused on the right markets: Latin America currently represents over half the company's earnings growth, while eastern Europe and Asia are also strongly represented. Equally important to profits is the potential for restructuring throughout the group, including the closure of breweries, which should help growth. The shares trade on 16 times UBS's forecast 2007 earnings and yield an estimated 1.7%.

C&C Group's (CCR, e8.77) shares have enjoyed a good run over the last few months as the popularity of its Magners cider brand has soared. C&C recently announced that revenues and profits for the first four months of the financial year were ahead of estimates and with the lion's share of the Irish cider market already cornered, C&C is set to treble its share of the long drinks market in the UK this year to 1.5%. The stock is priced for growth on a p/e ratio of around 30 times for this year, falling to 23 times on 2006/2007 consensus forecast earnings and 18 times on 2007/2008 estimates. Shareholders could be in for an extra windfall as the group considers the options for its soft drinks arm.