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Feeling the Buzz in Alcohol

By Anishka Clarke We at Standard & Poor's Equity Research believe the near-term outlook for the U.S. alcoholic-beverage industry remains positive. In our view, its fundamentals are supported by a recovering domestic economy, attractive demographics, and significant increases in brand investments by beverage companies.

Looking at the industry's key subgroups, we're positive on the domestic-brewing business. Favorable demographic trends, tame increases in commodity costs, and a continued favorable pricing environment should support modest expansion in 2004. However, we see shipment volume growth hurt as aggressive marketing by spirits and wine producers allows them to make inroads on the prized beer demographic -- the 21-27 age group.

"SWEET SPOTS." Nonetheless, continued productivity improvements at breweries and high industrywide capacity utilization should aid profit margins. We look for the beer industry's 2004 operating profits to rise about 7% to 8%.

The spirits industry should see further strengthening, driven by targeted marketing to demographic "sweet spots" (specific age groups), increased attention to the on-premise trade (establishments such as bars, restaurants, and clubs), and continued brand innovation. We see consolidation and changes in distribution strategies benefiting margins. We project that spirits makers' operating profits will increase 7% to 8% in 2004, following a rise of approximately 4% in 2003.

The wine industry outlook is also positive, as we expect higher volumes of case shipments to be driven by lower retail prices and increased off-premise consumption. Attractive demographic trends should also support growth. Operating profits will likely rise significantly in 2004, largely due to consolidation and, to a lesser extent, stabilizing raw material costs. Profits should also benefit from the synergies and cost savings generated by past merger-and-acquisition activity.

BUD AND JACK. Which stocks do we like best in the group? Our top pick among the brewers is Anheuser-Busch (BUD

; recent price, $52.57), which we rank 5

STARS, or buy. We see its profit margins expanding on worldwide volume growth, the acquisition of Chinese brewer Harbin, and continued cost savings. We have a 12-month target stock-price of $63.

Another 5-STARS pick is Brown-Forman (BF.B

; $47.74). We think it can sustain current strength in its leading brand, Jack Daniels, and we look for further gains in Southern Comfort and Finlandia, driven by effective marketing. We see competition limiting growth in its wine segment, however, and expect further weakness in its nonbeverage consumer products. Our 12-month target price is $58.

Our final top-ranked name in the group: Constellation Brands (STZ

; $36.96). We're encouraged by strong revenue growth in its wine and beer brands, though we see margins contracting in the near term on aggressive marketing efforts. We look for overall volume growth in fiscal 2005 (ending February) and margin recovery in fiscal 2006. Our 12-month target price is $44.

Note: Anishka Clarke has no stock ownership or financial interest in any of the companies in her coverage area, nor in any of the other companies mentioned in this report. She's a registered representative of Standard & Poor's Securities, Inc. (SPSI). For Required Disclosure information and Price Charts for all STARS ranked companies go to, click on "Investment Research", and then click on "Required Disclosures & Standard & Poor's STARS vs. Closing Prices Charts".

All of the views expressed in this research report accurately reflect the research analysts' personal views regarding any and all of the subject securities or issuers. No part of the analysts' compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.

Additional information furnished upon request to Standard & Poor's. Analyst Clarke follows alcoholic-beverage and tobacco stocks for Standard & Poor's Equity Research Services

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