Industry Analysis Brewers Presented by Daniel De Santis
Industry Analysis Brewers Presented by : Daniel De Santis Amy Wu Mike Chase Pauline Savoy Zhi Yuan Su(Max)
Industry Overview - General n Mature product ¡ n n Benefit of not being subject to volatile sales fluctuations Beer is the largest in the drinks sector Seasonality Steady increase in consumption Great consumer interest ¡ ¡ In US -2, 800 brands, three times a decade ago Solid niche markets developing
Seasonality
Industry Overview Companies n Largest brewers in mature markets (business strategy of consolidation) ¡ ¡ n Global market share of top 20 brewers is increasing ¡ ¡ n 1990 2000 -51% -65% Industry remains fragmented ¡ ¡ n Move to global consolidation Aggregate volume of the top 10 brewers has grown 4 x faster total industry since mid-1990 s 5 largest account for 30% of total volume Cigarette industry – 5 largest, 60% share Biggest brewers are not the most global ¡ Depends on the home market
Industry Overview – Growth Prospects n Mature in North America and traditional European markets ¡ n World’s top 5 per capita consumption in Europe Growth in: ¡ Eastern Europe and Russia n ¡ China n n Traditionally spirit drinking No 1 market in total volume Economic crises are good ¡ Switch from higher-priced spirits to lower-priced beer
Beer Consumption
USA – Growth n n n Seven consecutive years of growth up to 2002 growth of 1. 4 percent All-time record of 203 million barrels shipped Demographic Trends Increase driven by growth in light beer, and gains in imports
Top Brewers
Top US Brands
Industry Regulations n Extensive government regulations at : ¡ ¡ ¡ n Federal, State & Local Level an astonishing 44% tax of its retail price in US (2001) taxes equal 31. 7% of final sales of all products (GNP) in the U. S. (approx. 20% at the Federal level and 12% at the statelocal level) Brewers ¡ Beer Excise Tax
Government Measures n Decline in the USA in the early 1990 s ¡ n Individual consumption gradually declining since the early 1980 s ¡ n 100 % increase in federal tax Public policy measures of moderation and personal responsibility Potential government interference ¡ ¡ Large scale employer, and contributes large amounts of tax revenue Environmental issues
Porter’s Five Forces Model (Competitive Forces) Threats of New Entrants (Moderate) Bargaining Power Of Suppliers (Moderate) Rivalry among Competitors (Strong) Availability of Substitutes (Moderate) Bargaining Power Of Buyers (Very Strong)
Threats of New Entrants n Barriers to entry in the National Market ¡ ¡ ¡ n Large capital requirements and distribution networks Industry regulations Product standardization and heavily advertised Economies of Scale ¡ ¡ Fixed costs spread across large volume Product extension and brand proliferation eased
Rivalry among Competitors(USA) n n n 3 Competitive Rivalry Segments: ¡ National, Regional , and Microbrewers Dynamic Competitors ¡ 1800 domestic brewers & importers ¡ growing popularity of microbreweries and brewpubs n 5 times more breweries than in 1992 ¡ 2, 200 beer wholesalers, and 560, 000 retail establishments Imports ¡ Sales tripling in the past 11 years ¡ However, 90 % of all beer sold is Made in the USA
Substitutes n n n Growth in premixed drinks Malt beverages Health conscience population ¡ n Non-alcoholic drinks (juice, mineral water, milk, etc. ) Beer remains the largest drinks sector
Buyer’s Bargaining Power n n Low switching costs Price competition Advertising Promotional Schemes
Suppliers n n n Farmers Bottles/Can suppliers Union Labour ¡ Average pay $18. 27 an hour
Key Industry Success Factors 1. 2. 3. 4. 5. 6. 7. Low Cost Structure Distribution Channels Competitive Pricing Strong Advertising & Marketing skills Strong Brand Recognition Quality Innovation
Anheuser-Busch Companies Inc. Just Mike Chase
Company Overview n n n Production/Distribution of beer, Packaging and Busch Entertainment Largest Brewer in the world and U. S. Has 51. 6% of U. S. market and 11. 6% of global market Bud light has 19. 1% of U. S. market Budweiser # 1 brand in the world Other Brands: Bud Dry, Michelob Ultra, Busch, Natural Pilsner, World Select, Bacardi Silver, Doc’s Hard Lemonade, O'Doul's
2002 U. S. Market Share (Not including exports)
Operations n n A-B operates 12 breweries in U. S. Produced almost 110 million barrels in expanded capacity breweries Distribution through exclusive wholesalers, who gain from high margins and volume. Budweiser also produced in U. K. and Wuhan, China.
Subsidiaries and Consolidation n n n n Anheuser-Busch Packaging: aluminum and bottle recycling, packaging & printing. Busch Agricultural Resources Inc. Manufacturers Railway Company. Busch Entertainment Corp. http: //www. 4 adventure. com/home. aspx 50% interest: Grupo Modelo: Mexico. 20% interest: Compania Cervesias Unidas (CCU) Chile. 7. 2% interest: Tsingtao brewer: China. Partnership with Kirin, Japan. Partnership with Labatts.
Financials n n n n n Symbol: Price (03/11/03) 52 Week Spread: Market Cap: # of Shares: P/E Ratio: EPS: Book Value / Share: ROE: Indicated Dividends: BUD-N $49. 65 $53. 84 - $45. 30 $41, 049 million 878. 9 million 20. 30 2. 44 up 13. 8% 3. 61 down from 4. 62 54. 4% $0. 88 from 0. 75
Comparative Returns
Price History
Income Statement Analysis Dollar in millions except per share 2002 Net Sales $13, 566. 8 $12, 911. 0 $12, 499. 2 Net Income $1, 933. 8 $1, 704. 5 $1, 551. 6 Earnings/Share $2. 20 $1. 89 $1. 69 Dividend Yield 1. 4 1. 5 Annual Dividend $0. 75 $0. 69 $0. 63 Gross Margin 40. 1% 38. 4% 37. 4% Profit Margin 14. 3% 13. 2% 12. 4% 2001 2000 Profitability Ratios
Growth Analysis n Dividend Growth ¡ n Revenue Growth ¡ n 5 yr = 8. 5% 5 yr = 3. 98% EPS Growth ¡ ¡ 1 yr = 16. 4% 5 yr = 13. 46%
Growth Analysis
Balance Sheet Analysis 2002 2001 2000 Quick Ratio 0. 46 0. 45 N/A Current Ratio 0. 8 0. 9 Lt Debt / Equity 2. 16 1. 47 1. 30 Debt to Capitalization ratio 68. 4% 59. 6% 56. 5% Return on Assets 13. 7% 12. 2% 11. 8% ROE 54. 4% 41. 6% 38. 5%
Balance Sheet Analysis
Cash Flow Analysis n n Generating $2. 6 billion cash flow from operations. Free Cash flow of $1. 93 billion. ¡ n n Up 44. 2% from 2001. Reinvest in core businesses and packaging and entertainment. Continue to buy international businesses in high growth markets. Higher indicated dividends. Focus on share repurchase.
Management n n n n August A Busch: President A-B Inc. Steve Burrows: CEO of A-B International W Randolph Baker: V. P. , CFO A-B Inc. Keith N Kasen: CEO Busch Entertainment Joe Sellinger: CEO Packaging All promoted from within. Average of 10 to 20 years with A-B. Long term outlook for company performance.
Key Investment Positives n n n n Unbeatable domestic market share Extensive Exclusive Distribution Volume (Economies of Scale) Marketing Management Share repurchase strategy Strong network of growing and profitable Foreign Brewers Growing Volume, Revenue, FCF, EPS.
Key Investment Negatives n n High Debt ratios Growing debt servicing costs Slowing growth in domestic market Revenue and Profit growth from price increases and cost reductions.
Valuation Model n Gordon’s Growth Model ¡ ¡ n Good for stable companies Paying dividends that grow Stock Price = Ex (Div/Share) (k – g) n n g = 8. 525 over last 5 years k = 0. 1006 Two valuations using expected dividends vs. indicated dividends Expected: $53. 03 Indicated: $57. 33
Recommendation n n n Slowing growth in the Domestic Market Reaching Price Break Point Dominant and growing beer brands Distribution competitive advantage Strong International growth potential Favourable treatment of stockholders Dividend model value $53. 03 to $57. 33 Moderate Buy
CONTINUING TO DELIVER
Company Overview • • Founded 1786 – oldest brewer in North America One of the world’s largest brewers of quality beer Global brewer with $3. 5 billion in gross annual sales Operations in Canada, Brazil and the United States
Brands Molson Canada • Molson Canadian (light and ice), Molson Export, Molson Dry, Rickard’s Red, Pilsner, Carling Black label, Bavaria (import), & Tornade. Molson Partner brands • Coors Light, Heineken, Miller Genuine Draft, Corna, Foster’s Lager, Dave’s, Murphy’s Irish Stout, Caffrey, Milwaukee’s Best Dry
Brands Molson USA • Molson’s Beers imported directly from Canada: Molson Canadian (+ light), Molson, Ice, Molson Export, Molson Golden, Molson Excel Brazil • Kaiser Pilsen, Sa. Santa Cerva, Kaiser Summer Draft, Xingu, Kaiser Bock, Heineken (under licence), Bavaria Pilsen, Bavaria Premium
Operations • • 100% Molson Canada – brewers located throughout Canada 49. 9% of Coors Canada 50. 1% interest in Molson USA – markets and distributes the Molson brands in the US 80% of Kaiser in Brazil
Consolidations • • • Dec 2000 – entered the South American Market by acquiring Bavaria – a leading brand in Brazil Sold the Montreal Canadians (keeping 19. 9 share in the hockey team) Purchased Kaiser 2002 – 2 nd largest brewer in Brazil and merged Bavaria and Kaiser Heineken acquired 20% of the newly formed entity Molson does not plan any future Mergers or acquisition in the medium term. Export Strategy – New VP
Molson’s Strategy • • • Grow Operating Profits by 14. 5% annually Grow Market Share annually Grow Volume by 4% to 5% annually Organizational Renewal Improve Quality
2003 Market Share n Brazil – Market share increased from 3. 1% to 17. 8% - purchase Kaiser 2 nd largest brewer in Brazil.
Income Statement Analysis Year Net Sales Net Earnings 2003 2, 515. 2 312. 4 2002 2, 102. 3 177. 6 2001 1, 857. 1 133. 9 2000 1, 753. 7 (44. 0) 1999 1, 426. 8 169. 9 Earnings / Share 2. 45 1. 48 1. 12 (0. 37) 1. 44 23. 11% 17. 9% 18. 9% 5. 45% 13. 93% 12. 42% 8. 44% 7. 21% (2. 51%) 11. 91% Profitability Ratios Gross Margin Profit Margin
Sales by Region Volume by Region Fiscal 2003
Molson Stock Symbol: Recent Price(23/10/03) 34. 30 52 week range Market Cap(Mil) Share outstanding(Mil) P/E ratio: P/B ratio: EPS MOL. A $28. 00 - $38. 75 $4, 356 129. 0 16. 70 3. 92 2. 05
Comparative Returns
Molson – stock chart 12 months
Year 2004 2003 Dividend. 56. 42 2002. 38 2001. 36 2000. 36 % Change 5. 55 0 0 33. 3 10. 52
Balance Sheet Analysis Year 2003 2002 2001 2000 1999 Current ratio 0. 5: 1 0. 6: 1 0. 7: 1 0. 8: 1 Debt: equity ratio 54: 46 59: 41 52: 48 Interest 5. 4: 1 Coverage Return on Equity 28. 3% 4. 9: 1 3. 8: 1 0. 1: 1 2. 2: 1 18. 0% 14. 7% (4. 1%) 16. 3% Return on Assets 9. 1% 5. 7% 0. 9% 6. 8%
Cash Flow Analysis • • Positive operating cash flow – increasing trend over the past 5 years Investment activity: sale of 20% of its operations in Brazil contributed to its repayment of its long term debt. Investment activity: In order to achieve its cost saving measures, through the modernization of equipment, capital investment and infrastructure upgrades. Financing activity: repayment of long term debt, increase in cash dividends and share repurchase program.
Value Drivers • • • A global brewer and now the fifteenth largest brewer in the world (achieving economy of scale) Experienced and proven management team Succession planning program – top talent mentoring and leadership development Quality and brand recognition for Molson’s and partners in Canada and holding the #2 beer brand in Brazil Exceeding its’ quality and efficiencies goals Dividend growth over the past 4 years and strong financial growth over the past 5 years
Challenges / Risks • • • What if there is a substantial weakening in Brazilian economy (economic and political risk) Will there be further increase in the competitive environment in Canada (Ontario/West market share declining) How will the US dollar and the reais. (Exchange rate risk – Brazil and US)
Valuation Model n n n n Value of Stock: DPS/ (r-g) DPS(1) = Expected Dividend during the year k = Required rate of return for equity investors g = Growth rate in dividend g = 16. 47% (past 3 year growth rate of dividend) DPS(1) = DPS(0) = (1 + g) =. 56(1 + 16. 47%) =. 65 k = (DPS(0) / P(0)) + g = 0. 56/34. 3 +. 1647 = 18. 10% Value of Stock =. 65/(. 1810 -. 1647) = 39. 81
Recommendation • • Strong earnings Dividend Discount Model – Molson’s share undervalue Good management controls and strategies Recommend - Buy
Heineken N. V.
Company Overview n n n Originated in Amsterdam, Netherlands Heineken Holding (50. 005% of Heineken NV) Heineken Family (50. 005% of Heineken Holding) #1 in Europe and #2 worldwide
Cont’d n n 80% beer, 10% soft drinks and 3% spirits and wines Operating in over 170 countries and employing 48, 237 people around the world Market shares: Union 14%, Europe 12%, World 6% Traded on U. S. OTC under symbol HINKY
Brands n n n International Heineken premium brands -Heineken: premium segment -Amstel: mid-priced mainstream segment Local brands No low-priced segment
Geographical Distribution
News n n Acquisition, acquisition Amstel Beer is set to remain a sponsor of the UEFA Champions League in the coming years
Acquisitions in 2002 n n n Russia: Bravo international brewery Egypt: Al Ahram beverages company (public offer) Germany: Brauholding international (Joint venture) Costa Rica, Nicaragua, Panama, Kazakhstan Brazil: targeted on Kaiser (created by Molson) ……….
Goals and Strategy n n n Corporate level: single business Consolidation and international joint ventures Remain one of the top global brewers Being more profitable per hectoliter than other international brewers Building the most valuable brand portfolio
Balance 2002 Sheet 2001 2000 1999 1998 Total assets 4, 968 4, 136 6, 289 6, 017 2, 445 Current ratio 1. 06: 1 1. 37: 1 1. 27: 1 1. 11: 1 6. 70: 1 Shareholder’s equity 2, 543 2, 758 2, 396 2, 618 2, 299 D/E ratio 1. 52: 1 1. 10: 1 1. 15: 1 0. 90: 1 0. 06: 1 Shares outstanding 391, 979, 67 391, 979, 6 313, 583, 5 75 740 740 ROA 17. 5% 14. 7% 5. 0% 6. 1% 17. 9% ROE 31. 3% 25. 9% 19. 7% 18. 6% Market capitalization 15. 3 billion 18. 2 billion 20. 2 billion 15. 2 billion 16. 06 billion
Income 2002 Statement 2001 2000 1999 1998 Sales 10, 293 9, 333 8, 107 7, 148 6, 273 Volume 109 m 105. 1 m 97, 9 m 90. 9 m N/A Operating profit 1, 282 1, 123 921 799 445 12. 46% 12. 03% 11. 36% 11. 12% 7. 09% 795 767 621 516 427 7. 72% 8. 22% 7. 66% 7. 22% 6. 8% EPS 1. 64 1. 58 1. 98 1. 65 1. 36 Dividend per share 0. 4 0. 32 Operating margin Net profit Profit margin
Cash Flow Statement 2002 2001 2000 1999 1998 Cash flow from Oper. 1, 184 1, 165 1, 393 1, 205 882 Free cash flow 932 994 975 764 108 Cash flow from Inv. -1, 973 -783 -1503 -527 N/A Cash flow from fin. 427 -39 335 -13 N/A
Key Positives n n Strong and steady growth Brand names Global coverage New marketing strategy
Key Negatives n n Rivalries Scale and control Weak in U. S. market OTC limitations
Outlook n n n Dealing with uncertainty -economic slowdown “Taking Heineken to the next level” -new program targeting to raise operating efficiency and effectiveness -management works closer to the market “Beacon” project -retargeting on young consumers
Gordon’s Growth Model
Cont’d n n n n Value of Stock: DPS/ (r-g) DPS(1) = Expected Dividend during the year k = Required rate of return for equity investors g = Growth rate in dividend g = 5% (past 5 year growth rate of dividend) DPS(1) = DPS(0) * (1 + g) =. 4(1 + 5%) =. 42 k = (DPS(0) / P(0)) + g =. 4/36. 65 +. 5 = 51. 09% Value of Stock =. 42/(. 5109 -. 5) = 38. 53
Five Year Stock Performance
One Year Stock Performance
Stock Price Today n n n Symbol: HINKY Price: 36. 65 November 7, 2003 52 -week high: 40. 5 52 -week low: 31. 45 EPS: 1. 64 P/E ratio: 22. 35
Recommendation n n Modelwise Hold Strategywise Moderate buy/hold
Summary n n Mature Stable Returns Steady Growth Gains from consolidation ¡ n Value to shareholders’ Growth in developing markets
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