Alcoholic Beverage Stocks Regain Their Sparkle

And the party should continue, thanks to improved pricing for beer and favorable consumption trends. Here are S&P's top picks in the group

By Richard Joy

After significantly under-performing the market in 1999, shares of alcoholic beverage companies soared in 2000. The S&P index for the sector jumped 28% vs. a 9% decline in the S&P 500.

S&P expects the good times to continue, reflecting an improved pricing environment for beer, favorable demographic and consumption trends and the sale in 1999 by Stroh Brewing Company of its beer brands to Pabst Brewing and Miller Brewing companies. Stroh's exit has gone a long way toward improving the economics of the brewing industry by removing excess capacity.

We expect the brewing industry to increase volume more than 2% in 2001, led by continued strong growth of premium and light beers. And prices have been increased modestly, so margins should improve.

Shipments of distilled spirits in the U.S. are likely to remain in line with those in 2000, as higher disposable income offsets a continued moderating consumption trend. Wine products, however, may again buck the trend, thanks to favorable publicity about the health benefits of moderate consumption and to lower prices because of a drop in grape prices.

Longer term, we look for industry consolidation to accelerate, as companies seek to build economies of scale, improve pricing flexibility and build global capabilities.

Our top stock picks in the group: Anheuser Busch (BUD ) and Constellation Brands (STZ ), both ranked 5 STARS (buy); and Adolph Coors (RKY ), ranked 4 STARS (accumulate).

Joy is beverage industry analyst for Standard & Poor's

Before it's here, it's on the Bloomberg Terminal.