After my take on food stocks, in today’s second part of the series I am having a look at another failed group of consumer darlings – alcohol producers. These “sin stocks”, similar to tobacco, have been seen for long as one of the best ideas to play defense. Especially in crises, it was said people would smoke and drink even more. The only difference: valuations. While most tobacco stocks today are deep-value plays, alcohol stocks for a long time have had rather rich multiples. Frustrating for those who only looked at the perceived quality of the companies, but not their risks. With many alcohol companies trading substantially below their highs, is now the time to get active?
Summary and key takeaways from today’s Weekly
– In today’s second part of the series, I am looking at alcohol producer stocks which for long have been seen as high-quality picks.
– But the thesis for me clearly seems to be broken. There are concerning short- and longer-term trends.
– Paired with the still-not-low valuations, I can even imagine alcohol stocks to fall further.
For many investors this has likely been one of the most surprising developments – from a negative perspective, though.
Similar to REITs and food equities, alcohol stocks have been seen for long as great core investments due to their perceived high-quality profiles, well-known brands, constant and rising consumer thirst (so they thought), the rather concentrated playing field with many big brands in just a few established hands, generous dividends and sometimes also buybacks as well as the expected stability of the businesses.
What could go wrong?
Well, it’s more or less the same as always. When complacency takes hold, everyone is talking about and recommending the same stocks while ignoring potential risks, it is rather surprising that anybody is surprised at all that alcohol stocks experienced a massive hangover.
We are not talking about a small correction. Many of these stocks are far away from their all-time highs now and indeed in deep bear markets. The highly motivated buy-the-dip calls turned out to be ill-timed so far.
For me, the reasons are crystal-clear. While the valuation side was entirely ignored (which is naive enough), another structural aspect has come on top. It is even not unlikely that we’ll see alcohol stocks going through the same hell tobacco went through: extremely low valuation multiples for years to come. The remaining downside should not be underestimated.
I am going to explain why I think so and why one should better not rush in.
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Better times ahead after the headache?
One of the things I have learnt to practice is that when everybody agrees on the same thing, I should better be at least cautious. Not necessarily full-steam contrarian, but definitely not jumping on the same bandwagon. While in the short-term this approach often leads to missing on the joyful party, over time it helps to avoid lots of frustration and headaches.
For my take, I start to feel uncomfortable when an idea I am invested in is being discussed everywhere. Resisting when the temptation is high is a rare trait.
Which doesn’t mean I have perfected that craft.
It’s clearly still in the work-in-progress category. A few more recent examples were the uranium and met coal sectors. Still too many people are talking about them, posting on a daily basis about how attractive they are. My members had an exclusive idea each. I have closed both, because the investment theses were cracked. We exited both ideas on the positive side. The sectors fell strongly thereafter.
In theory everyone knows it, but in practice the majority does not: when something is extremely popular, the likelihood for great returns is small. Or from a risk-perspective: the potential bang for the buck is often not attractive in comparison to what could potentially go wrong. With valuation risks still not being seen as a risk factor by many, it is not surprising to see what has happened.
Stock picking is not just about picking the right stocks. It is also about not picking the wrong stocks.
For many inexperienced retail but also convinced dividend investors, alcohol stocks are core holdings, similar to not-growing REITs or food stocks (see some comments from me here, here, here and here).
Said and done, I could never warm myself up to buy even one of the famous alcohol stocks. In fact, I have even often criticized them, hinting at the then absurdly high valuations in comparison to what you got for your money.
As always, I don’t care about past performance or perceived brand value (which is a highly subjective thing and not immune from falling out of favor).
If the risk / reward is not attractive, it is not the time to go in.
With this, let’s have a look at some long-term charts of the usual suspects.
Today’s selection is a mix of two American, but predominantly European companies. Some are producing spirits and liquors, others beer or wine. Some are doing a mix.
My group for this Weekly contains:
- Brown-Forman (ISIN: US1156372096, Ticker: BF.B)
- Constellation Brands (ISIN: US21036P1084, Ticker: STZ)
- Pernod Ricard (ISIN: FR0000120693, Ticker: RI)
- Diageo (ISIN: GB0002374006, Ticker: DGE)
- Davide Campari (ISIN: NL0015435975, Ticker: CPR)
- Heineken (ISIN: NL0000009165, Ticker: HEIA)
- Anheuser-Busch InBev (ISIN: BE0974293251, Ticker: ABI)
- Carlsberg (ISIN: DK0010181676, Ticker: Carl B)
I’ll leave it to you whether we are seeing intact bull markets, mild and not uncommon corrections or maybe structural issues. Risking to state the obvious, these are ten-year charts and a period where we’ve seen an overall bull market.
Like with food stocks, alcohol companies are also known to be dividend payers. But in contrast to food stocks and due to the alcohol group’s formerly rich valuation multiples (discussed further below), dividends didn’t make that much of a difference.
At least far less.
As I have done with the food counterparts, I am posting a performance table for a better overview. I have marked the three best performers that stand out a bit:
| Company | 10-year performance (without dividends) |
| Brown-Forman | –12.3% |
| Constellation Brands | +46.6% |
| Pernod Ricard | –6.8% |
| Diageo | +15.3% |
| Davide Campari | +68.5% |
| Heineken | +1.6% |
| Anheuser-Busch InBev | –56.4% |
| Carlsberg | +42.7% |
We have a rather broad range from –56.4% (Anheuser-Busch Inbev) to +68.5% (Davide Campari). Out of in total eight:
- only three have a negative performance – but that’s a misery for a perceived defensive sector with high-quality names
- while the remaining five post a plus (though Heineken only with +1.6%)
- only three stocks have advanced by more than 40% – again, we are looking at a timespan of ten years where 40–50% plus dividends should be an expected performance to at least keep pace with the market average on a historical basis
This clearly shows that not all companies have had the same development.
Where they share commonalities, though, is they all had difficulties in keeping pace with the known market average of about 8% p.a. And all of them have fallen noticeably from their all-time highs. None is currently close to its top.
The following table shows – measured by eye – how much each respective stock has fallen from its top and how long the trend has been enduring.
| Company | down from all-time high | falling since |
| Brown-Forman | ~60% | 2021 |
| Constellation Brands | ~35% | 2024 |
| Pernod Ricard | ~55% | 2023 |
| Diageo | ~45% | 2021 / 2022 |
| Davide Campari | ~55% | 2021 |
| Heineken | ~20–25% | 2023 |
| Anheuser-Busch InBev | ~60% | 2016 |
| Carlsberg | ~35% | 2023 |
While the first table might be understood in a way that there’s only one really long-term struggling candidate with ABI (the world’s biggest beer brewer; did a big and expensive acquisition in 2015 with much debt), the second table does indeed tell a different story.
With the exception of Heineken, where I would say it looks more like a normal correction that can happen occasionally, every other stock is down by at least 35% from its all-time high, i.e. more than a third.
Four of eight, half of all, are down even by at least 50%.
When I see such numbers, I am hard to convince that this is just an overreaction of the stupid market who is always wrong anyhow, while amateur investors know better.
Also, it clearly breaks the naive assumption that alcohol stocks need to do well in all environments, because people always drink. Plus, well known brands will do well anyhow. This has clearly NOT been the case.
Sorry, but I have a bad message for you.
There are two things I have mentioned further above where I believe the root causes are to be found:
- excessive valuations that needed to be corrected
- a structural crack
To the right, you can see a headline that popped up a few weeks ago. Some argue that this might be the reason.
But the negative developments have been in the making for longer, hence this is maybe only the cherry op top.
I made a few other observations.
As I have talked about valuations, let’s first have a look at them.
Theoretically, after letting out some hot air, the historical upwards trend should resume at a certain level – when the bottom is in, likely when everybody hates these stocks and expectations fall from elevated to nothing.
How were these stocks valued over the last decade?
Here are the EV / EBITDA ratios which are a first (but bad) approximation to operating cash flow. The good thing is that net financial debt is included. I don’t like EBITDA, though because it is pre-tax and companies with high debt look more favorable due to this figure also being pre-interest.
However, PE is not useful as some companies have seen asset write-downs and also extreme swings, crashing the charts.
For our purpose it is suitable as it shows what I want to tell you.
All have in common that
- some time over the last decade they all had much higher valuation multiples
- they are all trading now at or close to their decade-lows from an EV / EBITDA perspective
The question of course is whether this is justified or not.
In the first charts, we can see valuations were extremely excessive with 20–35x even. Only Carlsberg seems to have been valued much more moderately.
Next, here is the sales growth over the last ten years (total, not per annum):
| Company | sales growth 2015–2024 (if available, otherwise latest figures) |
| Brown-Forman | +29% |
| Constellation Brands | +66% |
| Pernod Ricard | +29% |
| Diageo | +85% |
| Davide Campari | +87% (not organic, but nonetheless) |
| Heineken | +50% |
| Anheuser-Busch InBev | +37% (post-acquisition +5% 2017–2024) |
| Carlsberg | +13% |
The good news is that non of them has shrunk.
But none of them has seen high growth, either. As is not uncommon in the sector, there have been some acquisitions and also dispositions. The end result is the same, though.
Broken down to yearly growth rates, we are talking about true slow-growers as like with food stocks they operate in mostly saturated markets. It does not matter whether growth was / is 1% or 6% per annum. Measured against and compared to the valuation multiples from the charts above, it is clear these companies had lots of goodwill from investors.
People willing to pay 20x cash flow and even much more for such slow-growers is amazing. Thus, a hefty correction of at least a third is little surprising. Even some cosmetics from slightly higher margins due to portfolio optimizations or also minor buybacks do not change the outcome fundamentally.
By the way, don’t get fooled by seemingly low forward PE ratios.
All companies of this group have net debt. Many not even that little, making the PE ratio entirely useless.
But not just for this reason.
The former excessively high valuations could justify the recent drops easily alone.
But the question is, will these indeed be only temporary corrections or is there more in the bush? You likely guessed it: It is not just the valuation multiples.
After phenomenal years 2020–2022, depending on the company of course, a big industry-wide headache has set in. The recent results saw very unpleasant developments. Many companies have reached a level where they are not growing anymore at all, making even the current valuation multiples look still a bit elevated as there’s still a decent amount of growth priced in.
If confronted with the argument that quality has its price, I like to answer that even Apple (ISIN: US0378331005, Ticker: AAPL) was trading for an EV / FCF of 9x in 2018.
The chart below shows the quarterly sales growth figures.
We can clearly see a downtrend line where to the left almost all grew, most even strongly (lockdown effects). The recent numbers, though, predominately are showing shrinkage.
Oops.
No matter what they tell you and which magic adjusted figure they pull out, these companies are barely growing anymore. Worse, we are discussing even shrinkage. Despite all these phenomenal premiumization or emerging markets growth stories.
The former thesis seems at least cracked, if not entirely broken.
One of the issues, like with tobacco and also premium food brands, is that pricing has gone too far. People are switching to cheaper alternatives.
Also, personally, I am seeing many discounts in my local supermarket (I am predominantly looking in the whisky corner). Discounts seem not only larger than ever, but also one or the other pricier bottle that was never on sale can be fetched with a bit of luck. When there are sales, the entire series is quickly out of stock. Without discounts, the shelves are full.
Just as a side note.
A different and more short-term topic:
Likely the main driver for more abrupt price movements, is the entire tariff discussion. As we are having companies that don’t just sell domestically, but rely to a big extent on exports (Brown-Forman exports Jack Daniel’s to Europe, Constellation Brands imports beer into the USA e.g. from Mexico, the European companies export spirits and liquors to the USA, etc.) there’s currently lots of uncertainty.
The only thing certain seems that there’ll be higher tariffs, coming from both sides.
If they come, the respective companies will clearly be affected in the short- to medium-term. This should be priced in, though.
What is harder to digest and many seem to not want to realize it, is that we are seeing a huge generational shift in consumer behavior.
Pictures tell more than words, hence:
While the boomer generation is clearly in the majority, this often also wealthier group will slowly fade away with time. The following generations have already seen slightly falling demand.
But what comes with the latest Gen Z is truly shocking.
It was already noticeable with beer brewers. Alcoholic beer has been having a hard stand for years. What gave them some relief were non-alcoholic and / or mixed beer beverages.
Now, the spirits and liquor makers are the next in line.
I don’t know about you and I am certainly not representative. But: While a non-alcoholic beer can taste well, after having tasted a non-alcoholic gin (pure and with dry tonic), I must say I understand the sector’s headache.
A similar chart came across my desk, hinting in the same direction.
They only asked a good 1,000 people. That’s far from sufficient enough to be representative for an entire nation, not to mention a worldwide trend.
But from discussions with other people and also further research (including one of my stock ideas exclusively for my Premium PLUS members), it looks indeed that “quality over quantity” and “less is more” are the current zeitgeist.
Mix in the trend of alcohol-producers starting to go on an acquisition spree for non-alcoholic top brands like for example Carlsberg buying Britvic (see here).
Making matters worse, you will also find articles about especially the whisk(e)y sector having over-expanded (see here and here). Huge inventories are crippling them now.
Coming slowly to a close, the following chart is also telling.
Tobacco stocks are still trading at a tremendous discount compared to alcohol stocks. But they came from a much lower valuation level. And even though I am not convinced of tobacco stocks, especially after the recent run, I must nonetheless acknowledge their outperformance.
I also don’t care that Warren Buffett’s Berkshire Hathaway (ISIN: US0846701086, Ticker: BRK.A) has build a position in Constellation Brands.
To sum things up, I think my position is clear. Despite the strong price corrections, I do not see interesting enough setups. What is also a bit concerning is that there are still too many bulls out there calling for a bottom.
Conclusion
In today’s second part of the series, I am looking at alcohol producer stocks which for long have been seen as high-quality picks.
But the thesis for me clearly seems to be broken. There are concerning short- and longer-term trends.
Paired with the still-not-low valuations, I can even imagine alcohol stocks to fall further.
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