With few exceptions, 2018 was a terrible year for alcohol stocks. Booze consumption is on the rise, albeit at a slower rate than a few years ago, according to data researcher Nielsen. However, sales growth is being surpassed by expansion in new drink options -- driven by changing consumer trends, especially in the craft beer movement and other premium beverages. There have also been numerous shake-ups over the last few years, with brands changing hands and consolidating to fewer companies -- like Anheuser-Busch InBev's takeover of SABMiller in 2016 and purchase of a handful of regional craft brewers.
While innovation and choice are great for the consumer, it hasn't worked out so well for alcohol stocks. Sales and profit margins are under pressure, sending stock prices spiraling lower (with the exception of Sam Adams beer maker Boston Beer Company (NYSE: SAM), which rebounded from a terrible 2017). With many names beaten down and ignored by investors, some could be a real value as 2019 gets underway.
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Stay away from beer, except for this one
Constellation Brands has done well the last few years. Since the start of 2016, revenues have increased 21% and free cash flow (money left over after basic operations are paid for) is up 138% -- bucking slow-growth trends in the industry overall. Much of the company's success has been from Corona and Modelo import beers, but Constellation is a multi-brand company that also owns names like Robert Mondavi wine and SVEDKA vodka.
2018 will go down as the year Constellation adds marijuana to its portfolio. The company was an early mover into the Canadian pot industry, placing a whopping $4 billion investment on Canopy Growth (NYSE: CGC). To help pay for its new venture, the company is reportedly planning on selling part of its wine business for about $3 billion.
Since the announced investment, pot stocks have taken a huge step backwards. Canopy Growth's stock price has been cut in half from its all-time high reached over the fall months. Plus, Constellation hasn't been alone as other companies have followed its lead and made strategic investments in the marijuana industry. The market has taken note of the competitive landscape that is shaping up -- and the frothy valuation that Constellation made its bet -- and has punished Constellation shares, too.
However, after the drubbing, the multibrand adult beverage company looks like a real value. Shares trade at a mere 10.0 times the last year's worth of profits, even though total sales of beer were up 10.5% and wine and spirits up 9.3% in the company's second quarter of fiscal year 2019. Thus, this stock could be due for a bounce-back in the new year if that sales momentum continues.
Premium spirits, premium income stock?
Diageo is the world's largest distiller, with brands like Johnnie Walker, Crown Royal, Smirnoff, and Captain Morgan. It also plays in the beer industry with Irish brewer Guinness, though sales are a small fraction of the company's total.
Diageo has been in the process of whittling down its offerings to focus more exclusively on premium beverages. The company recently sold a handful of value brands to Sazerac and offloaded its small brewing operation in South Africa. Net proceeds are going toward share repurchases to aid in the return of capital to shareholders, and also help sharpen Diageo's focus on its fastest-growing and most profitable segment: premium spirits.
Distilling is a slow-growth endeavor, though, and Diageo's organic revenue growth has been in the low single digits (organic numbers exclude the effects of acquisitions and divestitures of brands) for years. Nevertheless, organic operating income is still on the rise (up 7.6% for the year ended June 30, 2018) and management introduced a new share buyback program totaling 2.0 billion euros over the summer. The dividend was also increased by 5% and is currently yielding 3% a year.
Though it's a boring stock, the slow-and-steady nature of Diageo's operations makes it worth keeping an eye on in an alcohol industry that has been marked by such great upheaval. Over the last trailing five-year stretch, share prices are up only 9.8% as of this writing, but total return with reinvested dividends has produced a 26% return. That's worth considering given how volatile other alcohol stocks have been lately.
Shifting consumer trends and growth in the number of beverage producers have made investing in alcohol a difficult endeavor over the last few years. 2018 will go down as one of the more forgettable stretches as the industry makes adjustments, but the pummeling many stocks have received could mean there's value to be had.
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Nicholas Rossolillo and his clients have no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Boston Beer. The Motley Fool owns shares of Molson Coors Brewing. The Motley Fool recommends Anheuser-Busch InBev NV, Constellation Brands, and Diageo. The Motley Fool has a disclosure policy.