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On Tap: Beer Stocks

Written By Brian Hicks

Posted January 14, 2010

I must admit that I was never much into chemistry...

Even still, I do know that when you combine hydrogen and oxygen in a certain manner you get water — the vital ingredient for beer. And when you add malted barley, yeast, and some hops… suddenly it’s "Miller Time."

Frothy and delicious, generations of people have been rewarding their hard-earned thirst with beer for thousands of years — as far back as 9000 B.C.

Since then, beer has become the world’s oldest and most widely consumed alcoholic beverage, the third most popular drink overall after only water and tea.

In fact, some would even go so far as to consider beer a gift from above: "Beer is living proof that God loves us and wants us to be happy." That’s what Benjamin Franklin said, anyhow.

And we all know how wise he was… which is one of the reasons I’m bullish on beer stocks.

When You Say Budweiser… You’ve Said It All

Now before I reveal my favorite beer stock, have a quick look at beer’s place in culture through the ages:

  • The Babylonians loved beer so much that if you served a watered-down batch, your punishment was to be drowned in it.
  • When the monks in the Middle Ages fasted, they were still allowed to pound a few beers. However, each monk was limited to just five quarts of beer a day. (The monastery must have its limits, right?)
  • The Pilgrims on the Mayflower stopped at Plymouth Rock rather than continuing on to Virginia because they were running out of beer. What’s more, while there wasn’t any cranberry sauce, mashed potatoes, sweet potatoes, or pumpkin pie to eat at the first Thanksgiving… we know for a fact that there was beer.
  • The Vikings drank so much beer before battles that they sometimes forgot to put their armor on — or their shirts. In fact, we can thank the bare-chested antics of the Vikings for the phrase "to go berserk." The Norse translation for berserk is bare shirt.
  • What’s more: according to Norse mythology, the Vikings believed that a giant goat whose udders provided an endless supply of beer was waiting for them in Valhalla.
  • It is believed that beer was one of the provisions Noah placed on the ark. (Come to think of it, if I’d known what Noah knew… beer would have been at the top of the list.)
  • If an ancient Egyptian gentleman offered a lady a sip of his beer, they were considered betrothed.
  • George Washington was a devout beer lover and stopped off at the old Bull’s Head Tavern for a sud when New York was finally evacuated in 1783. In fact, his ragtag group of rebels in the Revolutionary Army received daily rations of a quart of beer.
  • If you collect beer bottles, you’re a labeorphilist. And, if you collect beer coasters, then you’re a tegestologist.
  • Arnold of Soissons (ca. 1040 — 1087) is the patron saint of brewing. He encouraged the locals to drink beer instead of water due to its health benefits. He is also considered the patron saint of hop pickers because of the region in which he preached. Hops originated in Brabant region of Belgium; Belgians reportedly sent the first hops to England for use in making beer. No wonder they made him a saint!
  • A British man who was the victim of a car accident sued the other driver, claiming he had lost his ability to taste beer as a result of his injuries. The judge agreed that this was a "great loss" and awarded the man $14,076.
  • And finally, if you’re a serious beer lover, you may suffer from a condition known as cenosillicaphobia, the fear of an empty (beer) glass.
Bullish on Beer Stocks

Needless to say, that urge to tap a keg has created one of the biggest worldwide markets today, which is why beer stocks deserve a place in every investor’s portfolio as a defensive position against a renewed downturn.

And beer stocks could get a little frothy over the second half of the year if things play out according to the 2010 forecast, and if the consumer staples sector begins to heat up. A double-dip recession or not, worldwide beers sales should continue to rise.

In fact, by 2013, the global beer market is forecast to have a volume of 162.3 billion liters — an increase of 11% since 2008.

For the United States, that means beer sales will remain buoyant. This is important, since according to an economic impact study, the beer business directly and indirectly contributes more than $200 billion annually to the U.S. economy.

According to the study, that translates into more than one million jobs provided by the industry paying $28 billion in wages. Additionally, beer sales help support roughly 888,000 retail jobs, including those at supermarkets, convenience stores, restaurants, bars, stadiums, and other outlets and generate more than $25 billion in economic activity in the agriculture and manufacturing sectors.

Those are trends that are likely to continue, since a whole new generation of potential beer drinkers (age 24 and under) is now entering their peak years of beer consumption.

Believe it or not, these Generation Y drinkers even outnumber the Baby Boomers by over a million… and will likely out-chug their elders over time, as the market for beer expands both at home and abroad. Beer, after all, is a big global business.

Just this week, Heineken announced that it would buy the beer operations of Femsa, one of the biggest brewers in Mexico, in an all-share transaction that values the business at $7.6 billion. For that tidy sum, Heineken earned a bigger foothold in Latin America — including the highly profitable Mexican market.

But the Heineken deal was just part of the ongoing trend in the business. All of the big three American brewers — Anheuser Busch, Miller, and Coors — have either been acquired or entered into joint ventures with other brewers to beef up their market share.

In its wake, the number of companies in the U.S. brewery industry (excluding independents) has declined 30% over the last five years; two companies, ABInBev and MillerCoors, now account for 94% of U.S beer production.

What’s more, these recent mergers and joint ventures in the beer industry have given the consolidating sector the power to raise prices, even in the face of an economic downturn. That makes them strong defensive stocks in an otherwise bad economy.

Samuel Adams: America’s World-Class Beer

That being said, one of the sector’s top brewers remains the sole publicly traded American-owned brewer: Boston Beer Co. (NYSE: SAM), maker of Sam Adams.

Here’s why: The company’s per shareearnings are expected to increase 52% over the next two years — up from a projected $2.48 a share in 2009 to $3.78 a share in 2011. Additionally, the company increased its fourth quarter guidance for fiscal 2009, the second time in the quarter that the company had increased its full-year outlook.

What’s more, the company also has no debt, a large cash position, and the ability to boost production by 10% without expansion.

Those are fundamentals that I will drink to anytime, especially since SAM can easily add to its 1% market share.

In the meantime, I’m sure it’s BEER:30 somewhere… and that first frothy pint doesn’t stand a chance.

But remember, always drink responsibly. The life you save may just be your own.

Your bargain hunting analyst,

steve sig

Steve Christ, Investment Director

The Wealth Advisory

P.S. Speaking of Sam, our own Sam Hopkins is in Peru this week tracking down his next international moneymaker and, I’d suspect, a cold beer of his own. You can read more about Sam’s latest money-making investment trip right here.