Zacks Industry Rank Analysis Highlights: Anheuser-Busch, Boston Beer, Molson Coors, Shire PLC and UTD Therapeutic
BusinessWire - November 15, 2007 12:34 PM ET
Drinking a cold one is about to get more expensive. Hops, a key ingredient in beer, are in short supply. The Brewer's Association (an organization that represents microbrewers in the U.S.) estimates that hop production is 10-15% below current demand.
Mother Nature and farmers are to blame for the shortage. Weather conditions in Europe and Australia have hurt crops this year. Previous overproduction led farmers to curtail the amount of acreage devoted to growing hops. At the same time, higher demand for biofuels such as ethanol have made other crops (e.g. corn) more profitable for farmers. (The Brewer's Association estimates that worldwide hop acreage has decreased by 50% over the last 10 years.)
Boston Beer (NYSE: SAM) partially blamed the higher cost of hops for hurting profit margins. The brewer missed third-quarter expectations by three cents per share and lowered its guidance for full-year earnings. SAM expects 2007 per share profits to be in a range of $1.40 to $1.65; it had previously guided for profits between $1.42 and $1.70 per share. The company also warned rising ingredient costs would adversely affect margins in 2008.
The hops shortage is expected to primarily impact microbrewers. It should have a lesser impact on the major brewers, who may be able to exert greater pricing power.
Anheuser-Busch (NYSE: BUD) experienced a drop in gross margins during its third-quarter, but intends to "implement price increases on the majority of its U.S. beer volume in early 2008, with increases in several states in the fourth quarter 2007".
Molson Coors (NYSE: TAP) has also been pushing through higher prices, but also relied on cost-cutting measures to offset higher ingredient costs.
The impact of brewer size is apparent in how brokerage analysts are adjusting their forecasts for 2008. Last week, two of the three covering analysts cut their profit projections on SAM (the other analyst did not change his estimates). At the same time, four of the 12 of the covering analysts raised their forecasts on TAP last week. During the past 30 days, two analysts raised their projections on BUD and four lowered their forecasts.
It is likely that the lower-cost beers have more price elasticity than the higher cost, specialty beers. Ironically, higher beer prices could potentially help BUD and TAP as some consumers opt for lower price brands (e.g. Michelob, Coors) over premium "microbrew" brands (e.g. Abita, Shiner Bock).
BUD, SAM and TAP are all Zacks #3 Rank ("hold") stocks and are classified in Beverages-Alcoholic.