Carlsberg Undervalued And Executing Well

The market being what it is today, when I find a quality name that looks cheap, I get suspicious as to what I may be missing. In the case of Danish brewer Carlsberg (OTCPK:CABGY), I do see risks from the company's overreliance on mature Western European markets, iffy innovation history, and its lack of exposure to markets in Latin America and Africa. On the flip side, the company has done well in China, has chosen to prioritize value over market share in Russia, and has good leverage to growth in multiple Asian markets outside of China. In addition to that, management has built credibility where margin performance is concerned, with about two points of EBITDA margin improvement over the last five years.

Carlsberg's footprint isn't likely to offer the same growth as Heineken's (OTCQX:HEINY), and I likewise don't see the same degree of positive growth drivers as I do for Constellation Brands (STZ), but I do think mid-single-digit revenue growth is achievable, with improved scale and margin leverage opportunities driving FCF margins into the mid-teens and pushing mid-to-high single-digit free cash flow growth. With that, I believe Carlsberg could reasonably be expected to generate high single-digit annualized returns for shareholders from these levels.

 

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Carlsberg Undervalued And Executing Well

Carlsberg Has Exceeded Expectations, But There's Still More Work To Do

Relative to the skepticism that prevailed two or three years ago, Carlsberg (OTCPK:CABGY) (CARLb.KO) has executed well – not only against its self-improvement plan, but against a pretty challenging market environment. Management has exceeded its cost-cutting/savings goals, successfully introduced new products, and shown that it can drive revenue and profit growth from “premiumization” in mature markets, while building its business in emerging markets.

Carlsberg shares have outperformed most of its peer group over the past two years, handily surpassing ABInBev (BUD), Molson Coors (TAP), and Heineken (OTCQX:HEINY), though not matching the stellar performance of CR Beer. Valuation is mixed, with the shares not looking so appealing on discounted cash flow, but offering more upside on EV/EBITDA, and management still faces considerable challenges with a mature footprint and rising competition in some of the most attractive emerging markets.

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Carlsberg Has Exceeded Expectations, But There's Still More Work To Do

Squeezed On All Sides, Tsingtao Needs To Change

China's Tsingtao (OTCPK:TSGTY) is almost certainly the most recognizable Chinese beer brand in the United States and its flagship brand is still the leading single brand in China's large beer market, but that hasn't translated into much success lately for the company as a whole. Tsingtao has struggled to develop a cogent corporate strategy over the last five years, and the end result has been a weakening position in the attractive, growing premium categories as well as little traction in the mass-market/volume segment, not to mention steadily weakening margins.

While Tsingtao could be fixed, it is unclear to me if it will be. After two strong and successful management regimes, the approach of this management team seems muddled, unfocused, and not up to the challenges of competing with strong local rival China Resources Beer (OTCPK:CRHKY) (or "CRB") nor Anheuser-Busch InBev (NYSE:BUD) (or "ABI"). The shares are not dramatically mispriced, and Carlsberg's (OTCPK:CABGY) rumored interest in Asahi's 20% stake is encouraging, but it's hard to work up much enthusiasm for anything more than the potential of what a better-run Tsingtao could be.

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Squeezed On All Sides, Tsingtao Needs To Change

Heineken Well-Placed And Well-Run, But Also Well-Valued

Inspired by the impending takeover of SABMiller (OTCPK:SBMRY) by Anheuser Busch InBev (NYSE:BUD) (or "AB InBev"), I decided a little while ago to dig around in the beer sector to see if there were good bargains still hanging around. Heineken (OTCQX:HEINY), the world's third-largest brewer, has a lot of positives going for it, including a strong premiumization strategy, declining exposure to weaker markets, and a solid presence in several attractive markets.

What it doesn't have at this point is a discounted valuation. I accept that high-quality companies, particularly those in segments like consumer goods, often trade a premium, but every once in a while, some patience and a contrarian streak can turn up bargains. Priced for a high-single digit annual return, I think Heineken is a solid hold, but certainly not cheap enough to call it a "must buy".

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Heineken Well-Placed And Well-Run, But Also Well-Valued

Carlsberg May Find It Hard To Live Up To Market Expectations

With SABMiller (OTCPK:SBMRY) in the process of getting taken out by Anheuser-Busch Inbev (NYSE:BUD) (or "AB Inbev"), I've been doing some digging around the beer world to see if there are attractive prospects for reinvesting that cash. As one of the largest brewers in the world, and one that has had some difficulties for a while now, Denmark's Carlsberg (OTCPK:CABGY) was a natural one to research.

At this point, it looks like the market is already well on board with Carlsberg's self-improvement plans. I do see opportunities for Carlsberg to leverage growth opportunities in Asia and repair the Eastern European operations, but the fact remains that a large portion of Carlsberg's business remains tied to slower-growing, highly-concentrated markets in Western Europe. While I am "directionally bullish" on the company itself and I do think it is at least plausible that margins could improve more than I expect, the shares already reflect a lot of improvement yet to be seen in the financials.

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Carlsberg May Find It Hard To Live Up To Market Expectations

Seeking Alpha: SABMiller Can Still Sell A Self-Improvement Story

The dominant question for SABMiller (OTCPK:SBMRY) and the shareholders of this large brewer remains that of whether or not Anheuser-Busch Inbev (NYSE:BUD) will bid for the company to create a global titan in beer. Although I can understand some of the appeal of such a deal (very complementary market exposures and compelling operating scale), I think there are so many obstacles in the way of a deal that it is no better than a "maybe" at this point.

Can SABMiller do well enough on its own merits to justify buying or holding the shares today? The best I can say is "maybe", as my base-case expectations for long-term volume and revenue growth and margin improvement suggest the shares aren't very cheap today. Then again, global staples often maintain higher multiples than would otherwise seem fair and SABMiller still has significant opportunities to drive higher margins and returns on capital and the company does have that attractive kicker of heavy leverage to emerging markets with below-average current consumption patterns.

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SABMiller Can Still Sell A Self-Improvement Story

Seeking Alpha: M&A Could Add Even More Pop To SABMiller

Given the importance of scale and exposure to emerging market growth for global consumer businesses, it seems like a "when, not if" type of question regarding SABMiller's (OTCPK:SBMRY) future involvement in M&A. The key question, though, is whether SABMiller continues to play the role of acquirer and consolidator, or whether the company (likely grudgingly) finds itself scooped up.

Arguably SABMiller doesn't need to concern itself overly much with M&A. The company generates 70% of its profits from emerging markets, the highest such percentage among the major brewers, and is weighed to the lowest per-capita consumption markets (meaning that it can expect to benefit from rising incomes/consumption). Not only that, SABMiller is one of the largest Coca-Cola (NYSE:KO) bottlers and stands to benefit from a new JV in Africa as well as further potential expansion.

With M&A likely to factor heavily in the company's future, a stand-alone valuation may be beside the point. That said, mid-single digit revenue growth and further incremental FCF margin potential do support the stock at this level, with M&A potentially adding revenue (if SABMiller buys) or margin synergy (if SABMiller is a seller) to the valuation.

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M&A Could Add Even More Pop To SABMiller

Seeking Alpha: SABMiller Pretty Foamy, But With Great Emerging Market Leverage

As a long-time shareholder of SABMiller (OTCPK:SBMRY), I really can't complain - the shares may have lagged Carlsberg (OTCPK:CABGY), Heineken (OTCQX:HEINY), Molson Coors (TAP), and Anheuser Busch InBev (BUD) over the past 12 months, but over the last five and 10 years, they've blown away the field (and it's not really even close). Looking ahead, I'm admittedly concerned by the take-no-prisoners valuation, but also encouraged by the company's leverage to growing, under-penetrated emerging markets, strong asset and cash flow leverage, and potential for further accretive acquisitions.

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SABMiller Pretty Foamy, But With Great Emerging Market Leverage

Investopedia: It's Still Miller Time In The Emerging Markets

A wide range of consumer stocks have enjoyed very strong runs in the market, and alcoholic beverage companies like Diageo (NYSE:DEO), Anheuser-Busch InBev (NYSE:BUD), and SABMiller (Nasdaq:SBMRY) have been among the strongest performers. Valuations are starting to look pretty overheated, even allowing for improving global consumer incomes, easing input costs, low rates, and so on. Even so, investors looking for relatively liquid plays on the ongoing growth of emerging economies may want to consider SABMiller for its broad exposure to markets like Africa, Latin America, and China.

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Seeking Alpha: SABMiller - An Excellent Play On Emerging Markets

Beer is admittedly not the greatest growth market in the world. You can find beer in almost every corner of the world and consumption growth more or less tracks GDP growth. Nevertheless, while SABMiller (Nasdaq: SBMRY.PK) may not be in position to post eye-popping topline growth, few other companies are so poised to take advantage of population and income growth in the emerging markets of the world.


Everywhere But Here
Miller and Miller Lite are pretty well known brands to American investors, but the fact remains that for all of the well-known brands like Miller, Peroni, Pilsner Urquell, and Grolsch, only about one-third of the company's business comes from North America and Europe (combined). SABMiller's Latin American business is larger than either of those regions and Asia is growing quickly in importance.

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SABMiller: An Excellent Play On Emerging Markets