Heineken N.V. Offers Above-Average Growth And Margin Self-Help, But A Lot Of That Is In The Share Price Now

 

Operating conditions have remained challenging for brewers, particularly brewers like Heineken N.V. (OTCQX:HEINY) with above-average exposure to on-premises channels (basically, beer consumed outside the home), as pandemic lockdowns have seriously hurt business in Western Europe and some Latin American countries. The good news, such as it is, is that the first quarter will likely be the last really poor one ahead of recovery for the rest of 2021.

Navigating the pandemic isn’t Heineken’s only challenge. The company is really the last of the major brewers (depending upon your definition of “major”) to launch a large-scale restructuring program, and management is targeting significant expense reductions, but only expecting to get back to around pre-pandemic margins in 2023. While bulls see this as a conservative guide, that may not be the case given Heineken’s model.

These shares have done okay since my last write-up, mostly tracking with the S&P 500 and other brewers like Anheuser-Busch InBev (BUD), Carlsberg (OTCPK:CABGY), Diageo (DEO), while Constellation (STZ) has outperformed and Molson Coors (TAP) has significantly outperformed (much to my own surprise). At this point, I would say Heineken is an okay hold, with some positive leverage to premiumization, volume growth, and self-improvement, but with some fundamental challenges as well.

 

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Heineken N.V. Offers Above-Average Growth And Margin Self-Help, But A Lot Of That Is In The Share Price Now

Heineken Is Leveraged To Growth Markets, And Has Above-Average Margin Leverage Potential

In a beverage market that doesn’t offer a lot of obvious bargains, I like to look for company-specific drivers and stories that could help separate a company from the pack, and I think Heineken (OTCQX:HEINY) has that. Heineken was an early mover in shifting its mix up-market (premiumization), which is a key factor in offsetting declining beer consumption in developed markets. At the same time, Heineken has created an attractive long-term growth footprint in significant emerging markets like Vietnam that can help drive greater long-term growth. Last and by no means least, Heineken has not yet really prioritized optimal operating efficiency, and I believe this is a significant potential margin driver.

I’d describe Heineken’s valuation as “okay” more than “compelling”, but I do like the business and the potential for both superior long-term growth and improving margins. With a mid-to-high single-digit total annualized return potential, this is a name I’d consider if you want exposure to this sector.

 

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Heineken Is Leveraged To Growth Markets, And Has Above-Average Margin Leverage Potential

Driven By OXXO, The Core FEMSA Story Remains Attractive

FEMSA (FMX) isn’t the simplest company, nor does it offer the cleanest, most straightforward financial reports, but at its core this remains a well-run play on Latin American consumers. Underpinned by the OXXO convenience store business, I believe FEMSA has a long runway of attractive growth opportunities and the capital to further enhance its prospects. Currency moves and the health of the Mexican economy are key variables, but with a double-digit implied return on offer, I believe this remains a good candidate as a core holding for investors who want some emerging market exposure.

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Driven By OXXO, The Core FEMSA Story Remains Attractive

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

A Tale Of 2 FEMSAs

All in all, Mexico’s FEMSA (FMX) continues to perform relatively well, though there has certainly been a sharper distinction lately between the strong performance of the retail operations and the lackluster-to-disappointing results of Coca-Cola FEMSA (KOF). With improved profitability in the drugstore business, a good long-term growth plan for the core OXXO operations, and opportunities for Coca-Cola FEMSA to do better, I continue to believe this is a good core holding for investors who want exposure to Mexican/Latin American consumers.

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A Tale Of 2 FEMSAs

FEMSA Offers Long-Term Value, But 2018 Won't Be A Banner Year

FEMSA’s (FMX) performance over both the past few months and the past year has been decidedly mediocre, as the company continues to work through some restructuring efforts at Coca-Cola FEMSA (KOF) while building up its Health (drugstores) and Fuel (gas station) operations. Add in foreign currency volatility and undeployed capital from a partial sale of its Heineken (OTCQX:HEINY) stake, and there are a lot of moving parts working against the bottom line.

I continue to believe that FEMSA is a well-run conglomerate that offers good exposure to Latin American, and particularly Mexican, consumer spending growth, but challenges in Mexico, Brazil, and the Philippines are likely to keep a lid on performance in 2018. A fair value in the neighborhood of $105 still makes this a name worth considering, but I expect the shares to mark time at least until the elections in Mexico are decided.

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FEMSA Offers Long-Term Value, But 2018 Won't Be A Banner Year

A Little Near-Term Softness Hasn't Changed The FEMSA Story

Although FEMSA (NYSE:FMX) haven’t done all that well since my last write-up, I think the modest pullback could be another opportunity for long-term investors to acquire shares in one of the best-run Mexican companies, not to mention one with consider room left to grow. FEMSA shares have been hurt by a combination of currency moves, natural disaster-related traffic disruptions, and some concerns about capital allocation, but I believe these are all short-term issues that don’t impinge upon the underlying value.

I continue to believe that FEMSA will leverage long-term high single-digit revenue growth into double-digit FCF growth, supporting a fair value in the $105 to $115 range. FEMSA has several NPV-positive potential capital projects to choose from, including accelerating the growth of OXXO, acquiring more drug stores, or expanding further outside Mexico, and I believe pullbacks below $100 are good buying opportunities.

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A Little Near-Term Softness Hasn't Changed The FEMSA Story

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

Kirin's Self-Improvement Amply Rewarded

Up more than a third over the past year (and around 30% over the past two years), Kirin (OTCPK:KNBWY) has outperformed peers like Asahi (OTC:ASBRY), Sapporo (OTC:SOOBF), and Suntory (OTCPK:STBFY) as management has made several moves to improve several underperforming segments of the business, including the sale of the long-struggling Brazilian operation to Heineken (OTCQX:HEINY). Now the question is what Kirin management can do to stimulate growth when its core market(s) offer minimal underlying growth at best and acquisition prices are steep.

Kirin shares deserved their run, but management needs to prove that it can deliver more than low single-digit FCF growth in the future. Although the underlying growth assumptions are not very high here, and the shares are undervalued on the basis of established industry M&A premiums, Kirin's best growth opportunities hinge upon the company executing well in precisely those places where it has struggled, and that's a little too aggressive for my comfort today.

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Kirin's Self-Improvement Amply Rewarded

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: Improving Traffic And Aggressive Capital Deployment Makes FEMSA An Intriguing Story

I can't complain about FEMSA's (NYSE:FMX) performance since my last write-up, as the U.S. ADRs of this leading Mexican retailer have risen more than 10%. Better still, the company's underlying financial performance has been pretty solid, and management has continued to deploy capital to support the long-term growth of the business.

I really like the company's expansion into Chile's drugstore sector, and I fully expect that FEMSA will follow it up with an expansion of its OXXO C-store concept into this under-penetrated country. I also expect further consolidation of the Mexican drugstore market, and I wouldn't be surprised if Coca-Cola FEMSA (NYSE:KOF) looks at a deal or two of its own. There is also the question of what FEMSA's management may elect to do with its Heineken (OTCQX:HEINY)(OTCQX:HKHHY) stake now that the lockup has expired and an acquisition of Heineken by SABMiller (OTCPK:SBMRY) is clearly off the table.

The "but" is that the move in the shares has mopped up a chunk of the undervaluation I saw back in the summer. I still like FEMSA as a long-term holding as I believe the company is on a trajectory to become one of, if not the, largest retailers south of the U.S. border over time. At this point, though, I would be inclined to advise new investors to hold off on building a full position in the hope that a market pullback would greater a bigger discount to full value.

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Improving Traffic And Aggressive Capital Deployment Makes FEMSA An Intriguing Story

Seeking Alpha: FEMSA Continues To Play The Long Game

As a family-controlled operation, FEMSA (NYSE:FMX) management has the option to run the business with an exceptionally long-term focus and make trade-offs between short-term growing pains and long-term opportunities. To that end, recent ventures into fast food, pharmacies, and gas retail aren't going to do much to boost near-term valuation, but they support a long-term vision of FEMSA as a comprehensive play on the Mexican consumer across multiple facets of their lives.

The near-term performance of FEMSA's ADRs is certainly tied to the performance of the Mexican peso, and that's not a good thing at the moment. Nevertheless, I believe these shares now trade at a double-digit discount to fair value and offer a good option for investors looking to gain exposure to the Mexican consumer.

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FEMSA Continues To Play The Long Game

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: FEMSA Leveraging OXXO And Has Ample Dry Powder

The Mexican economy isn't helping much, but FEMSA (NYSE:FMX) continues to post respectable results on the back of its strong OXXO convenience store chain. Taxes in Mexico and extreme currency problems in Venezuela are hurting the company's stake in Coca-Cola FEMSA (NYSE:KOF), but FEMSA continues to explore new avenues of growth in Mexican retail like pharmacies, restaurants, and now gas stations and has the option of using its Heineken (HINKY) stake to fund larger initiatives.

Operationally, FEMSA still looks like an attractive stock to hold, but currency moves have negatively impacted my valuation. At around $90 or below, I would certainly give strong consideration to adding this name to a portfolio, as I believe it not only one of the best-run Latin American companies, but also one with extensive growth options for the coming years.

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FEMSA Leveraging OXXO And Has Ample Dry Powder

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

The Motley Fool: FEMSA Hopes to Put a Tough Year Behind It

The past year was not a particularly strong one in the consumer sectors of Latin American countries like Mexico and Brazil, and that was not good news for FEMSA (NYSE: FMX  ) . One of Mexico's largest corporations, FEMSA has a significant presence in the retail/consumer world with its stake in Coca-Cola FEMSA (NYSE: KOF  ) , a large Latin American Coca-Cola bottler, a 20% stake in brewer Heineken, and ownership of Oxxo, the third-largest retailer in Mexico.

The challenge for investors is weighing out the short-term challenges presented by a possibly improving (but not yet strong) Mexican economy, new taxes, economic problems in Argentina and Venezuela, and competition against the long-term opportunity of growing Coca-Cola FEMSA and leveraging the retail operations into new areas like pharmacies and fast food that are still underpenetrated in Mexico.

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FEMSA Hopes to Put a Tough Year Behind It

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: 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?