Chapter 1: The Beer Industry Landscape

The beer industry boasts a rich history, making it hard to envision its abrupt decline. Thus, investing in beer-producing companies could serve as a reliable long-term strategy for peace of mind. In my previous research on major breweries worldwide, the findings were somewhat lackluster. Therefore, I have chosen to explore four alternative beer companies and assess which one might yield the best return on investment.

Please note that this is not financial advice. I'm not a certified financial advisor and share my analyses solely for discussion purposes. If you consider investing based on my insights, it's crucial to conduct your own research or consult a professional financial advisor, as all investments carry inherent risks.

In my earlier analysis, I examined which large brewery would be the most prudent investment. The companies discussed here differ as they produce other beverages, such as soft drinks or spirits, in addition to beer. Some operate as subsidiaries with their own stocks. Despite their differences, all these companies share a common thread: they sell beer. This analysis will compare their financial metrics to identify the most promising investment.

1.1 Overview of Selected Companies

Ambev is a Brazilian brewery recognized for popular brands like Skol and Brahma, as well as the widely consumed soft drink Guarana Antartica. Notably, Ambev is the largest Pepsi bottler outside the United States and distributes PepsiCo products throughout Brazil and other Latin American nations. For a detailed analysis of Ambev, click here.

Compañía Cervecerías Unidas is a Chilean brewery known for its beers, including Cristal and Escudo. In addition to beer, this company offers soft drinks, mineral water, juices, energy drinks, pisco, cider, and wine. Its operations extend beyond Chile to Argentina, Bolivia, Colombia, Paraguay, Uruguay, and Peru.

Constellation Brands, an American company, is famous for distributing Modelo and Corona beers in the U.S. Beyond beer, it also offers spirits and wines. For more information, check my detailed analysis of Constellation Brands here.

Royal Unibrew is a Danish brewery known for its Royal and Ceres beers. Additionally, it produces Faxe Kondi, a popular soft drink in Denmark, and ready-to-drink cocktails. Royal Unibrew collaborates with PepsiCo to distribute products in Denmark and owns breweries in Latvia, Lithuania, Norway, and Poland, exporting globally.

1.2 Financial Metrics Analysis

The first financial metric I'll analyze is the Return on Invested Capital (ROIC), which reflects a company's ability to allocate capital effectively for profitable investments. I've opted for the five-year ROIC to gauge pre-pandemic performance. I typically favor a ROIC above 10%. Historically, Royal Unibrew has excelled in ROIC, but in 2022, Ambev outperformed all companies in this regard. Compañía Cervecerías Unidas has not matched the high ROIC of Ambev and Royal Unibrew, while Constellation Brands has reported negative ROIC in three out of the last five years. Based on ROIC, the ranking is as follows: Royal Unibrew, Ambev, Compañía Cervecerías Unidas, and Constellation Brands.

The next metric to evaluate is the gross profit margin, which indicates the earnings remaining after the cost of doing business is deducted. Ambev has maintained the highest gross profit margin for three years, while Constellation Brands led in the last two years. In 2022, Royal Unibrew had the lowest gross profit margin but performed better than Compañía Cervecerías Unidas in the other four years. Thus, the ranking based on gross profit margin is: Ambev, Constellation Brands, Royal Unibrew, and Compañía Cervecerías Unidas.

Let's now consider the operating margin, reflecting the profit generated after accounting for variable costs like production and labor. Constellation Brands has achieved the highest operating margin in four of the last five years, while Ambev held the second position consistently. Royal Unibrew ranked third across all years, with Compañía Cervecerías Unidas at the bottom. The operating margin ranking is: Constellation Brands, Ambev, Royal Unibrew, and Compañía Cervecerías Unidas.

Next, we will examine the levered free cash flow margin, which indicates the funds remaining after all financial obligations are met. Ambev has outperformed in this category for four out of five years, while Constellation Brands led in 2022 and was second in the other four years. Royal Unibrew ranked third in the last three years, but its performance in 2018 was less impressive. Compañía Cervecerías Unidas has struggled since 2019, even recording negative free cash flow in 2022. The ranking for levered free cash flow margin is: Ambev, Constellation Brands, Royal Unibrew, and Compañía Cervecerías Unidas.

1.3 Valuation Comparison

Now, let's evaluate valuations using the EV/EBITDA ratio, which, despite its limitations, is useful for comparing companies within the same sector. Unlike previous metrics, a lower EV/EBITDA ratio is preferable. I'll provide current figures for context: Ambev at 8.9x, Compañía Cervecerías Unidas at 8.4x, Constellation Brands at 16.1x, and Royal Unibrew at 15.0x. Historically, Royal Unibrew and Constellation Brands have maintained higher EV/EBITDA ratios, and this trend continues. However, Royal Unibrew's current ratio is below its five-year average of 17.5x, while Constellation Brands is above its average at 16.1x. Ambev is currently trading at its lowest EV/EBITDA ratio in five years, significantly below its five-year average of 11.3x, and Compañía Cervecerías Unidas remains above its average of 7.9x.

1.4 Conclusion: The Best Investment

After thoroughly analyzing these metrics, Ambev emerges as the standout choice. It has consistently delivered strong financial results and is currently trading at its lowest EV/EBITDA ratio in five years. If I were to invest in any of these companies, Ambev would be my preferred option. Although Constellation Brands performed well in 2022, its negative ROIC in three out of five years and high valuation make it less appealing for investment now. Royal Unibrew has shown solid ROIC but still exhibits disappointing profit margins, while Compañía Cervecerías Unidas has delivered overall unsatisfactory financial performance. Therefore, I will not be pursuing investments in these companies at this time.

This first video features Andrew Beer discussing managed futures and investment strategies, providing insights into the financial landscape.

The second video highlights a non-alcoholic beer company's successful $50 million funding round, demonstrating the growing interest in alternative beverages.