industry analysis brewers presented by : daniel de santis amy wu mike chase pauline savoy zhi yuan...
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Industry AnalysisBrewers
Presented by : Daniel De Santis
Amy Wu
Mike Chase
Pauline Savoy
Zhi Yuan Su(Max)
Industry Overview - General
Mature product 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
Largest brewers in mature markets (business strategy of consolidation) Move to global consolidation Aggregate volume of the top 10 brewers has grown 4x faster
total industry since mid-1990s Global market share of top 20 brewers is increasing
1990 -51% 2000 -65%
Industry remains fragmented 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
Mature in North America and traditional European markets World’s top 5 per capita consumption in Europe
Growth in: Eastern Europe and Russia
Traditionally spirit drinking China
No 1 market in total volume Economic crises are good
Switch from higher-priced spirits to lower-priced beer
Beer Consumption
CountryShare(2001)
Per Capita Consumption
(in liters)US 16.4 83.1
China 14.3 15.8Germany 7.3 123.1
Brazil 5.8 46.7UK 4.1 97.1
Japan 3.6 40Mexico 3.5 48.6
Russian Federation 3.1 30Poland 1.7 60.5France 1.5 35.9
Czech Republic 1.2 158.1
USA – Growth
Seven consecutive years of growth up to 2002
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
9%
9%
6%
6%
5%
4%3%
3%3%2%2%
48%
AB
SABMiller
Heineken
Interbrew
Carlsberg
Ambev
Coors
Modelo
Scot & New
Tsingtao
Asahi
Others
Top US Brands
Rank Brand Brewer Market Share1 Bud Light A-B 19.12 Budweiser A-B 16.33 Coors Light Coors 8.54 Miller Lite Miller Brewing 7.95 Natural Lite A-B 4.16 Busch A-B 3.97 Corona Extra Modelo 3.48 Busch Light Draft A-B 2.79 Miller High Life Miller Brewing 2.710 Miller Genuine Draft Miller Brewing 2.5
Industry Regulations
Extensive government regulations at : 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 state-local level)
Brewers Beer Excise Tax
Government Measures
Decline in the USA in the early 1990s 100 % increase in federal tax
Individual consumption gradually declining since the early 1980s 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)
Availability of Substitutes(Moderate)
Rivalry among Competitors
(Strong)
Bargaining PowerOf Buyers
(Very Strong)
Threats of New Entrants Barriers to entry in the National
Market 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)
3 Competitive Rivalry Segments: National, Regional , and Microbrewers
Dynamic Competitors 1800 domestic brewers & importers growing popularity of microbreweries and brewpubs
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
Growth in premixed drinks Malt beverages Health conscience population
Non-alcoholic drinks (juice, mineral water,milk, etc.)
Beer remains the largest
drinks sector
Buyer’s Bargaining Power
Low switching costs Price competition Advertising Promotional Schemes
Suppliers
Farmers Bottles/Can suppliers Union Labour
Average pay $18.27 an hour
1. Low Cost Structure
2. Distribution Channels
3. Competitive Pricing
4. Strong Advertising & Marketing skills
5. Strong Brand Recognition
6. Quality
7. Innovation
Key Industry Success Factors
Anheuser-Busch Companies Inc.Just Mike
Chase
Company Overview 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,
Michelob Ultra, Busch, Natural Pilsner, World Select, Bacardi Silver, Doc’s Hard Lemonade, O'Doul's
2002 U.S. Market Share(Not including exports)
Miller19%
Coors11%
Other21%
Anheuser-Busch
49%
Operations 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 Anheuser-Busch Packaging: aluminum
and bottle recycling, packaging & printing. Busch Agricultural Resources Inc. Manufacturers Railway Company. Busch Entertainment Corp.
http://www.4adventure.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 Symbol: BUD-N Price (03/11/03) $49.65 52 Week Spread: $53.84 - $45.30 Market Cap: $41,049 million # of Shares: 878.9 million P/E Ratio: 20.30 EPS: 2.44 up 13.8% Book Value / Share: 3.61 down from
4.62 ROE: 54.4% Indicated Dividends: $0.88 from 0.75
Comparative Returns
Price History
Income Statement AnalysisDollar in millions except per share
2002 2001 2000
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 1.5
Annual Dividend $0.75 $0.69 $0.63
Profitability Ratios
Gross Margin 40.1% 38.4% 37.4%
Profit Margin 14.3% 13.2% 12.4%
Growth Analysis Dividend Growth
5 yr = 8.5% Revenue Growth
5 yr = 3.98% EPS Growth
1 yr = 16.4% 5 yr = 13.46%
Growth Analysis
$11,000
$11,500
$12,000
$12,500
$13,000
$13,500
$14,000
2002 2001 2000 1999
Annual Revenue
Balance Sheet Analysis2002 2001 2000
Quick Ratio 0.46 0.45 N/A
Current Ratio 0.8 0.9 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 Generating $2.6 billion cash flow
from operations. Free Cash flow of $1.93 billion.
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 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 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 High Debt ratios Growing debt servicing costs Slowing growth in domestic market Revenue and Profit growth from
price increases and cost reductions.
Valuation Model Gordon’s Growth Model
Good for stable companies Paying dividends that grow
Stock Price = Ex (Div/Share)
(k – g) 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 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, 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, 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, SaSanta 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 – 2nd 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
Brazil – Market share increased from 3.1% to 17.8% - purchase Kaiser 2nd largest brewer in Brazil.
42
43
44
45
46
47
48
49
Market Share in Canada
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2nd qt
Income Statement AnalysisYear
2003 2002 2001 2000 1999
Net Sales
2,515.2
2,102.3 1,857.1 1,753.7 1,426.8
Net Earnings
312.4 177.6 133.9 (44.0) 169.9
Earnings / Share
2.45 1.48 1.12 (0.37) 1.44
Profitability Ratios
Gross Margin
23.11%
17.9% 18.9% 5.45% 13.93%
Profit Margin
12.42%
8.44% 7.21% (2.51%) 11.91%
Sales by Volume by Region Region
Fiscal 2003
Canada Brazil USCanada Brazil US
Molson Stock
Symbol: MOL.ARecent Price(23/10/03)34.3052 week range $28.00 - $38.75Market Cap(Mil) $4,356Share outstanding(Mil) 129.0P/E ratio: 16.70P/B ratio: 3.92EPS 2.05
Comparative Returns
Molson – stock chart 12 months
0
0.1
0.2
0.3
0.4
0.5
0.6
Growth Analysis - Dividends past 5 year
2004
2003
2002
2001
2000
Year 2004
2003 2002 2001 2000
Dividend .56 .42 .38 .36 .36
% Change
33.3 10.52 5.55 0 0
Balance Sheet Analysis
Year 2003
2002 2001 2000 1999
Current ratio
0.5:1 0.6:1 0.7:1 0.8:1 0.8:1
Debt:equity ratio
54:46 59:41 59:41 52:48 52:48
Interest Coverage
5.4:1 4.9:1 3.8:1 0.1:1 2.2:1
Return on Equity
28.3%
18.0%
14.7%
(4.1%)
16.3%
Return on Assets
9.1% 5.7% 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
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 are undervalue• Good management controls and
strategies• Recommend - Buy
Heineken N. V.
Originated in Amsterdam, Netherlands
Heineken Holding (50.005% of Heineken NV)
Heineken Family (50.005% of Heineken Holding)
#1 in Europe and #2 worldwide
Company Overview
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
Cont’d
Brands International Heineken premium brands
-Heineken: premium segment
-Amstel: mid-priced mainstream segment
Local brands No low-priced segment
Geographical DistributionEurope
WesternHemisphere
Africa/Middeleast
Asia/Pacific
News Acquisition, acquisition, acquisition Amstel Beer is set to remain a sponsor
of the UEFA Champions League in the coming years
Acquisitions in 2002 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 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 Sheet2002 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
391,979,675
391,979,675
313,583,740
313,583,740
313,583,740
ROA 17.5% 14.7% 5.0% 6.1% 17.9%
ROE 31.3% 25.9% 25.9% 19.7% 18.6%
Market capitalization
15.3 billion 18.2 billion
20.2 billion
15.2 billion
16.06 billion
Income Statement2002 2001 2000 1999 1998
Sales 10,293 9,333 8,107 7,148 6,273
Volume 109 m 105.1m 97,9m 90.9 m N/A
Operating profit 1,282 1,123 921 799 445
Operating margin 12.46% 12.03% 11.36% 11.12% 7.09%
Net profit 795 767 621 516 427
Profit margin 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 0.4 0.4 0.4 0.32
Cash Flow Statement2002 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 Strong and steady growth Brand names Global coverage New marketing strategy
Key Negatives Rivalries Scale and control Weak in U. S. market OTC limitations
Outlook 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
0
0. 1
0. 2
0. 3
0. 4
0. 5
Year1998
Year1999
Year2000
Year2001
Year2002
Cont’d 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 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 Modelwise
Hold Strategywise
Moderate buy/hold
Summary
Mature Stable Returns Steady Growth Gains from consolidation
Value to shareholders’ Growth in developing markets