Beer Stocks Morphed Into Hard Seltzer Stocks. Now, It’s All About Prepared Cocktails. But There’s a Better Way to Profit from the Alcoholic Beverage Industry.
The best beers can be hard to find. The best beer stocks can be even harder to find, especially these days. Once, we looked at them differently from alcohol stocks. But the lines have blurred with the spike in sales of hard seltzer and prepared cocktails. Here is a little guide on how to make money investing in beer stocks this year. But first, let me tell you about some of my favorite beers—and when to drink them.
Tough Match-up for Craft Brewers
Prior to Covid, every February I played in an annual pond hockey tournament with a group of college friends on Lake Winnipesaukee in New Hampshire.
We always had mixed results on the ice. But we always have a fridge full of New England’s best beer. And the boys from Idaho always brought an assortment from their part of the country too. Most importantly, we were able to connect every year and share long tales and tasty suds.
Get Your FREE REPORT
Find out which stocks you should buy this month to make money in this changing market.
For many years our beer selection was mostly Vermont offerings since that’s where we all went to college. And they were mostly double IPAs (DIPAs).
Over the years things progressed to include more session and super session IPAs, lagers, pilsners, and other varieties. The geographic reach of beers grew too as more became available.
As trends go, we went through the phase when the high-octane IPA boom wound down, the 16-ounce craze blew up, then subsided, and finally the options of “normal” 12-ounce cans of IPAs in the 4.8% to 6.5% alcohol range took up more space in the fridge.
Easy to drink, and easier to get up the next morning, seemed to be the trend. Or at least it was with us.
If I had to narrow down the list of the five most popular craft brewers that we’ve enjoyed over the years, I’d say the two leaders for DIPAs and IPAs remain the Alchemist (Stowe, VT) and Trillium Brewing (Boston, MA).
For other offerings (including a few more IPAs), there were a lot of cans from Tree House Brewing (Charlton, MA), Nightshift (Everett, MA) and Hill Farmstead (Greensboro Bend, VT) leaving the fridge.
The most popular new offers at the last weekend came from the expanded beer list at Lawson’s Finest Liquids (Waitsfield, VT), which now has a new taproom. If you can get your hands on their Scrag Mountain Pils or The Space In Between offerings you’ll be a happy camper.
Unfortunately, Covid crushed our game plan and now two from our group have moved – one to South Carolina and one to Idaho. I don’t know if we’ll go back to New Hampshire this year. On a more positive note, we are talking about a pond hockey tournament in Idaho. Frankly, that sounds even better!
In any event, in terms of investment potential, there are still a few ways to invest in the beer industry. But none of the companies mentioned above are publicly traded. And to be perfectly honest, beer isn’t a driving success factor for most of the publicly traded beverage companies right now.
The real growth has been in hard seltzer and prepared cocktails. Looking at 2020, industry data shows hard seltzer sales grew 165%. Sales of prepared cocktails grew by almost 70%.
More recently, growth in hard seltzer is moderating while prepared cocktails is taking off. In June, cocktail volumes were up 36% while hard seltzer was up less than 4%. The implications here are that the hard seltzer market is relatively mature. As people go back out to bars and restaurants volume may actually decline, while analysts see lots more growth in prepared cocktails and non-alcoholic categories (like energy drinks).
A concern for brewers is that a lot of the hard seltzer and prepared cocktail growth comes at the cost of beer volumes. This is why diversified beverage companies are rushing to bring new seltzers and cocktails to market. And it’s why none of the publicly traded beer stocks (those that are left) are particularly enticing at the moment.
Boston Beer (SAM) stock is doing poorly (despite growth in hard seltzer), large-cap player Molson Coors (TAP) is doing OK, and small-cap players like Waterloo Brewing (WBR.TO) are not great.
Thinking big picture, my take is that it’s the packaging players that are winning right now. They are the surest bet as can volume is somewhat insulated from trends in brewers and beverages of choice. These packagers simply capture growth across both old and emerging categories, including beer, energy drinks, hard seltzer, prepared cocktails, etc.
In short, if can growth is up, that’s good for the packagers, regardless of what’s in it.
To put this in crystal clear terms, a recently research note from Bank of America asserts that roughly 70% or so of new beverage SKUs are in cans. That’s a trend. And if you want to be on the right side of it, don’t make life complicated. Go with the packaging companies and, for now, forget about the brewers.
The Best Beer Stocks to Buy Now are the Packagers
Best Beer Stock #1: Ball Corporation (BLL)
Ball Corp (BLL) makes metal packaging products for the beverage, food, and personal care industries. The company is based in Colorado, has a market cap of $31 billion and pays a 0.85% dividend. Back in 2016 it acquired Rexam, a U.K.-based competitor, and this combination of the world’s two largest beverage can makers has helped Ball become a bigger and stronger company.
While that acquisition closed years ago, the pitched benefits are being enjoyed now. Part of that pitch was that Ball could achieve hundreds of millions of dollars in annual synergies, aggressively pay down debt, buy back shares, and hike its dividend. With the stock having performed well since the Rexam deal closed it appears the acquisition was a good move.
Competition is fierce in this industry, but Ball is a market leader and with all the new beverage options out there the company has recently begun to grow again.
One of the reasons the stock is doing well right now has nothing to do with beer. It is because sales of non-alcoholic beverages are so strong and because the tide is flowing away from plastic and glass and toward cans. Beverage lines used to be around one-third cans. Now, it’s two-thirds.
Also, Ball has seen the North American beverage can market evolve. It was once roughly 66% alcoholic and 34% non-alcoholic. That split is closer to 60%/40% now thanks to growth in energy drinks and other categories.
Within alcoholic drinks, Ball is seeing a lot of growth from spiked seltzer, which makes up around 5% of current volume.
Bottom line – cans are where it’s at and Ball has them. On the downside, it could use more of them. Capacity constraints are curbing growth.
Still, looking out a few years it seems Ball is sitting pretty. Analysts see revenue growing 16% to $13.65 billion this year, then growing another 10% in 2022. Adjusted EPS should grow by nearly 20% this year and next, meaning dividend increases are likely.
Best Beer Stock #2: Crown Holdings (CCK)
Pennsylvania-based Crown Holdings (CCK) makes steel and aluminum cans and metal caps for the food and beverage and household and consumer products markets. The company has a market cap of almost $15 billion.
As with Ball, the current attraction is that Crown offers exposure to growth in sales of beverage cans. There’s more going on behind the scenes with respect to new projects, operational improvements and other initiatives that should keep modest growth intact and offer some margin improvement, but for our purposes it’s really all about the cans right now.
As if to drive that point home, Crown Holdings recently sold off a major part of its non-beverage related business. The European Tinplate business, which brought in $2.3 billion in 2020 (21% of total revenue), was recently sold to KPS Capital Partners for $2.3 billion. Divesting the business, which focused on food cans, aerosol cans, metal closures, etc., will allow Crown to pay down debt, return money to shareholders and invest in more growth-oriented areas of the business (i.e. beverage cans).
On the last quarterly conference call management talked about how capacity is constrained and will be for a little while longer. While not great news, the implication is that growth should accelerate into 2022 when constraints fall off. Couple that with higher orders from customers (management said global beverage can volume should grow just above 10%), a new southwestern U.S. plant opening in 2023 (one in Kentucky just opened too), and what management sees as “no shortage” of new beverage product ideas, you have a very bullish outlook for the next two-plus years.
Turning to the numbers, Crown Holdings saw 2020 revenue shrink by 6% (the pandemic affected this) to $11 billion. In 2021 analysts see revenue growing by 4% to $11.5 billion. However, keep in mind that this includes selling off roughly 20% of the business, so the actual growth rate of the retained business is much higher than that 4% figure implies. For example, in Q2 2021 Crown’s North American and European beverage businesses grew by 41% and 45%, respectively. Crown Holdings should grow EPS by around 26%, to $7.46, this year.
I don’t cover either BLL or CCK in Cabot Small-Cap Confidential or Cabot Early Opportunities since these aren’t exactly early-stage or small-cap stocks. Still, they’re interesting stories that I think can fit in a lot of investor portfolios, especially right now.
To find out what small-cap stocks have made the cut for Cabot Small-Cap Confidential, grab a subscription today. And if you’re more into the early-stage ideas, check out Cabot Early Opportunities. Both portfolios are chock full of profit-making growth stocks.
Which beer stocks do you invest in?
Tyler Laundon is chief analyst of Cabot Small-Cap Confidential and Cabot Early Opportunities. The circulation of Small-Cap Confidential is strictly limited because the undiscovered stocks with sky-high-potential that Tyler recommends are often low-priced and thinly traded. Don’t share these recommendations!Learn More
*This post has been updated from an original version, published in 2017.