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: China Resources Enterprise Rebases Around Beer

Playing to your strengths is great, but most companies won't go to the lengths that China Resources Enterprise (OTCPK:CRHKY) (291.HK) is going. Recognizing that turning around the Tesco retail operations (and its own retailing business) was at best a multiyear project and one that investors largely hated, and that those efforts would limit the company's ability to build scale in food and beverages, China Resources Enterprise announced that it will exit all but its beer operations. This will come in the form of a sale to China Resources Holdings and it will leave China Resources Enterprise as a pure-play on the largest beer business in China.

This has been a lousy call for almost two years for me, so I can't pretend I'm not relieved to see the announcement. The beer business was always the primary appeal of CRE to me (though I thought there was potential in the beverages operation and long-term turnaround potential in retail) and I do still see ongoing value in the shares for that operation. That said, I only see about 10% upside from here and that's not enough compensation for the risks of fiercer competition within China, potential disappointments in demand development, and company-specific execution challenges.

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China Resources Enterprise Rebases Around Beer

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: China Resources Enterprise Languishing Over Short-Term Concerns

Another six months are in the books, and little has changed for the better at China Resources Enterprise (OTCPK:CRHKY). The Chinese food retail environment continues to be a tough one, with most of the major players seeing their comps turn negative. I believe CRE remains well-placed to benefit from growth in its beer JV and beverage business, and I continue to expect management to drive better long-term results from the Tesco (OTCPK:TSCDY) joint venture. In the meantime, though, it will be hard for these shares to get ahead while the Chinese food retailing market remains weak and while investors remain concerned over the near-term losses that CRE will absorb from the Tesco JV.

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China Resources Enterprise Languishing Over Short-Term Concerns

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

Seeking Alpha: Amidst A Weak Chinese Consumer Market, CRE Faring Even Worse

Naming China Resource Enterprises (OTCPK:CRHKY) as a Top Pick in August of 2013 has been a lousy call so far. Down almost 20%, about the best thing I can say about that call is that most of the Chinese consumer sector has gotten hit too, with Sun Art (OTCPK:SURRY), Lianhua (OTCPK:LHUAF), and Tsingtao (OTCPK:TSGTY) down about 5% to 10% over the same period on a lot of worries (and some reality) about weaker consumer spending in China.

At the risk of doubling down on a bad call, I do believe that the market is playing up short-term risks and losing sight of what CRE can accomplish over the long term. Clearly "can accomplish" is not the same as "will accomplish", but I expect CRE to leverage leading share in Chinese food retailing and beer into a strong mix of revenue growth and higher margins down the road. I've lowered my expectations and fair value to account for the near-term softness and the earnings dilution from the Tesco JV, but I continue to believe these shares are an interesting long-term opportunity.

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Amidst A Weak Chinese Consumer Market, CRE Faring Even Worse

Seeking Alpha: CRE Playing The Long Game In China, And Looks Significantly Undervalued

Investors know all too well how challenging it can be to generate long-term gains from Chinese equities. Leaving aside those companies that play fast and loose with accounting or pin their hopes on favored relationships with government officials, there are the rapidly-changing economic trends that may make long-term forecasting even more challenging.

All of that said, I think investors should give serious consideration to China Resources Enterprise (CRHKY.PK). While CRE carries the black mark against it of being a state-owned enterprise, the company has emerged as a leading retailer and brewer in this fast-growing economy, and is looking to invest more in its food processing and beverage businesses.

What's more, the company plays the long game - using JVs and foregoing quick near-term profits to build a larger, more profitable business down the road. All told, I believe a case can be made that CRE shares should appreciate 40% to 50% over the next 12 to 18 months as China recovers and investors return to names leveraged to Chinese consumer spending.

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CRE Playing The Long Game In China, And Looks Significantly Undervalued

Investopedia: Even When Coca-Cola Stumbles, It Does Okay

If this is what a bad quarter from Coca-Cola (NYSE:KO) looks like, it's not hard to see why the stock carries a rich multiple. Even in one of the weakest quarters in a long time (from a volume perspective), Coca-Cola did well with its margins. Add in the possibility of improving the company's global operations, particularly in fast-growing markets like China and Indonesia, and the long-term prospects still look pretty good. Alas, the stock still isn't anything close to “cheap” and is unlikely to become so anytime soon.

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Investopedia: Constellation Brands Comes In A Little Soft, But Will Anyone Really Mind?

It's always fun to own a stock that Wall Street wants to like, and that seems to be the case for Constellation Brands (NYSE:STZ). I can appreciate at least some of the enthusiasm; the company learned its lesson from rampant over-expansion by M&A and the acquisition of Crown Imports give the company not only more balance, but legitimate organic growth opportunities. Even so, investors have to pull out all of the stops for this stock to look cheap and I'd be cautious about going that far.

A Slight Operating Miss For The Fiscal First Quarter
Constellation Brands didn't have a bad first quarter, but the results weren't anything special either. All told, I doubt it will do much to dent investor enthusiasm for the stock unless there's a larger exodus away from consumer staples.

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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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Investopedia: Pricey Constellation Brands Has A Lot To Live Up To

Complaining about the high valuation of beverage stocks like Coca-Cola (NYSE:KO), Diageo (NYSE:DEO), and Anheuser-Busch InBev (NYSE:BUD) is largely a futile exercise. Investors prize the strong cash flows and returns on capital that these businesses can achieve, and many analysts and investors are completely sold on the idea that ongoing income growth in the emerging market will lead to both higher sales and higher scale-driven margins down the line.

I can accept all of that to a certain point, and I certainly can't complain if the market wants to award a rich valuation to the shares of SABMiller (OTCBB:SBMRY) that I own. In the case of Constellation Brands (NYSE:STZ), I can see multiple avenues for better long-term performance, particularly if the U.S. Department of Justice ultimately gives the “all clear” to the restructured Grupo Modelo transaction. That said, investors should ignore the strong performance expectations that are already built into the valuation and the risk that the shares could underperform the market as a result.

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Seeking Alpha: Does SABMiller Taste Great, Or Is The Valuation Too Filling?

This has been a good year to own companies in the adult beverage trade, as stocks like Anheuser-Busch InBev (BUD), Diageo (DEO), Pernod-Ricard (PDRDY.PK), and Heineken (HINKY.PK) have all outperformed the S&P 500 by a significant margin. The world's second-largest brewer, SABMiller (SBMRY.PK) belongs on that list of outperformers as well, as investors have bid up the shares on improving volume growth and margins. Looking out into 2013, though, the question is whether SABMiller is still poised to be an outperformer.

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Does SABMiller Taste Great, Or Is The Valuation Too Filling?

Seeking Alpha: Can Labelmaker Multi-Color Make The Leverage Stick?

Multi-Color (LABL) is the sort of obscure small-cap company that I love; the company's products are ubiquitous and essential (product labels), but nobody really ever thinks about them. What's more, Multi-Color is a good play not only on the overall volume growth of consumer goods, but also on the increasing sophistication of labels and the very fragmented nature of the industry. While Multi-Color is not a very liquid or well-covered stock, I believe patient investors will be impressed with what this company becomes over the next three, five, or 10 years.

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Can Labelmaker Multi-Color Make The Leverage Stick?

Seeking Alpha: Multi-Coloar Got Too Hot, But Still Has A Solid Future

Like any investor, I like seeing the stocks I buy for my portfolio go up. I do get a little nervous, though, when they seem to go too far too fast and that was recently true for the relatively unknown label manufacturer Multi-Color (LABL).

In the last few weeks, investors seem to have realized that expectations were getting a bit too hot for this company and the stock sold off. Matters were likely not helped any by the relatively low sales volumes reported by major consumer goods companies (and LABL customers) like Procter & Gamble (PG) and SAB Miller (SBMRY.PK). Top that off with a superficially disappointing quarter, a relatively thin float and little sell-side support and it wasn't too surprising to see the stock pull back on earnings.

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Multi-Color Got Too Hot, But Still Has A Solid Future

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

Seeking Alpha: Multi-Color - An Emerging Leader In An Unknown Market

Quick! Name a company that manufactures the labels that go on the food, beverages, or consumer goods that you buy at the store every week. The odds are very good that, unless you work in the field, you cannot name one. Product labels are ubiquitous and a $30 billion global industry, but a hugely fragmented market. Multi-Color (Nadsaq: LABL) is looking to change that through a combination of innovative internal product development and acquisitions.

Labels Are Everywhere...
Maybe it's too obvious to point out that almost everything on a store shelf has a label on it. Not only are labels legally required on many products, but labels represent a final marketing touch that companies can use to make their products pop out from the competition and draw the attention of shoppers. While this is a large business, $30 billion worldwide and $9 billion in North America, it is incredibly fragmented – Multi-Color is the #2 player in North America, but holds less than 3% share and is one of only seven companies with more than $200 million in revenue.

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Multi-Color: An Emerging Leader In An Unknown Market

Seeking Alpha: FEMSA Richly Valued, But Rich In Growth Opportunities

Like most other emerging markets, 2011 was a disappointing year for Mexico. Despite a drop of worse than 20% in the Bolsa, consumer products concern FEMSA (FMX) had a quite a strong year. While FEMSA's stock is no longer a bargain, patient investors may yet see further growth in the company's core OXXO franchise as well as new growth initiatives and capital redeployments that could build meaningful long-term value.

The Future In C-Stores
Although FEMSA's interests in Coca-Cola FEMSA (KOF) and Heineken are nothing to ignore, the company's OXXO convenience store franchise is really the story right now. With over 9,000 stores and about 5% share of Mexico's food and convenience retail market, OXXO is the dominant C-store franchise in Mexico and one of the most profitable retailers in the region – surpassing the likes of WalMex (WMMVY.PK), Cencosud, and CBD (CBD).

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FEMSA Richly Valued, But Rich In Growth Opportunities

Positive Volume Update From SABMiller

A little good news this morning from another portfolio holding - SABMiller (Nasdaq: SBMRY; LSE: SAB).

SABMiller reported that third quarter volumes increased 3%. That's about double the consensus expectation (+1.6%) and a decent result. SABMiller also reported that net organic sales increased about 6% for the same period. So, assuming that the company did okay on its margins (which isn't always the case), it was a pretty solid third quarter.

Looking at the numbers in a little more depth...

-Asia and Africa were both up 12% (in volume). That's great growth and a validation of SABMiller's emerging markets strategy, but the base to those numbers is low and the price points are still low.

- LatAm down 1%. A little disappointing, but SABMiller has always been challenged in this region. Hopefully Heinken will do a bit better, as my stake in FEMSA (NYSE: FMX) gives me a rooting interest there. More likely, though, Anheuser-Busch InBev (NYSE: BUD) is still doing pretty well...

- South Africa up 3% - good to see the company doing alright in its core market.

- Europe flat. I'd call that a surprisingly strong result given all of the negative chatter about Europe.

- U.S. down 2.5%. Still a tough market, and one that I don't think SABMiller likes all that much. I'm keeping my fingers crossed that SABMiller is smart enough not to double-down and acquire Molson Coors (NYSE: TAP) or any other U.S. asset. SABMiller did very well through this recession by focusing on emerging markets, and they'd be very wise to continue investing accordingly. I just wish there was a way they could increase their ownership in the beer JV they have in China w/ China Resources Enterprises (0291.HK).

As for the stock, SABMiller is another high-quality name in my portfolio that is depressing close to my fair value target. I'd really rather not sell, but it's foolish to ignore other great companies with cheaper stocks.

So, for now, HOLD SABMiller, but I'm looking to slowly shuffle towards the exit.

Disclosure: I own shares of SABMilller and FEMSA