Malt 'n' Hops Skips and Jumps

Brewers have joined S&P's top Relative Strength rankings, thanks to growing sales, consumers' taste for premium brews, and new products

By Sam Stovall

Lift a glass to the most recent addition to the list of industries with top Standard & Poor's : Brewers. Investors thirsting for an oasis of relative safety in a parched stock market have lifted shares of this classic defensive group. Year to date through August 2, 2002, the S&P Brewers subindex gained 12.4%, vs. a 24.0% decrease in the S&P 1500 index (the combined S&P 500, S&P MidCap 400, and S&P SmallCap 600 indexes).

S&P analyst Richard Joy expects more of the same in the near term, and maintains a positive investment outlook for the group. He cites a favorable pricing environment for beer and improving demographic consumption trends (the number of consumers reaching legal drinking age has been steadily rising in recent years). Other positive factors include favorable energy and commodity costs for brewers, continued productivity improvements, and high capacity utilization rates throughout the industry.

STRANGE BREWS.

  Joy says sales volumes for the U.S. brewing industry are likely to grow 1% to 1.5% in 2002, despite modest price increases, led by continued strong growth of light beers and alternative malt beverage products, such as hard lemonades. These "malternatives" are estimated to have added some 2 million barrels to the U.S. beer industry in 2001, seizing a 2.5% to 3.0% share of the market. Joy thinks this segment should continue to thrive in 2002. He notes that industry leader Anheuser-Busch has joined the malternative fray, launching its new Bacardi Silver beverage during the first quarter.

There are other encouraging signs for the domestic beer industry. The group is realizing higher net revenues per barrel, reflecting increased consumption of high-margin premium products and the successful implementation of price hikes and discount reductions by Anheuser-Busch. Joy notes that price increases implemented during the fourth quarter of 2001 and the first quarter of 2002 have taken well in the marketplace, with the other U.S. heavyweights, Miller (now a unit of South Africa-based SABMiller) and Coors, marking up their offerings as well.

And the manufacturers of leading import brands Corona and Heineken imposed price hikes as well during the first quarter of 2002. Their success should help support continued margin improvement for the industry through the balance of the year, says Joy.

OVERSEAS SUDS.

  Competition remains heavy, though. Joy says premium domestic beer brands should continue to face challenges from fast-growing import beers, as European brewers consolidate and gain marketing and distribution muscle in the U.S. Consumption trends for import beers should benefit from higher disposable incomes and a narrowing of the price gap with domestic premium beers. With U.S beer volumes expected to increase only 1% to 1.5% in 2002, according to Joy, domestic brewers will likely continue to seek out foreign investments to enhance the international growth of their brands.

What are Joy's top picks in the group? He ranks both Anheuser-Busch (BUD ) and Coors (RKY ) 4 STARS, or accumulate.

S&P Relative Strength Rankings

These industries carry 12-month relative strength rankings of "5" as of Aug. 2, 2002 -- meaning that they're in the top 10% of the 114 industries in the S&P Super 1500 (the combined S&P 500, S&P MidCap 400, and S&P SmallCap 600) based on prior 12-month price performance.

Industry/Sector Largest Company (Market Cap.) S&P STARS* Rank
Brewers/Consumer Staples Anheuser-Busch (BUD) 4 STARS
Casinos & Gaming/Consumer Discretionary Harrah's Entertainment (HET) 4 STARS
Distillers & Vintners/Consumer Staples Constellation Brands (STZ) 5 STARS
Gold/Materials Newmont Mining (NEM) 4 STARS
Household Products/Consumer Staples Procter & Gamble (PG) 5 STARS
Housewares & Specialties/Consumer Discretionary Fortune Brands (FO) 5 STARS
Managed Health Care/Health Care UnitedHealth (UNH) 5 STARS
Metal & Glass Containers/Materials Pactiv (PTV) 5 STARS
Personal Products/Consumer Staples Alberto-Culver (ACV) 5 STARS
Soft Drinks/Consumer Staples PepsiCo (PEP) 5 STARS
Water Utilities/Utilities Philadelphia Suburban. (PSC) 4 STARS

*S&P's ranking system for the appreciation potential of stocks over a 6- to 12-month period: 5 STARS (buy), 4 STARS (accumulate), 3 STARS (hold), 2 STARS (avoid), 1 STAR (sell)

Stovall is chief sector strategist for Standard & Poor's

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