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Alcohol stocks have some attractive characteristics, which fit the requirements of risk-averse investors. Some of these companies have popular brands and thus they enjoy strong pricing power and rich cash flows. In addition, consumers do not reduce their consumption of alcohol drinks during recessions and hence these stocks are fairly resilient to recessions. In this article, we will discuss the prospects of three high-quality alcohol stocks.

Diageo (DEO)

Diageo is a large producer of alcoholic drinks. It dates all the way back to the 17^th century and the Haig family, the oldest family of Scotch whisky distillers. Diageo has 20 of the world’s top 100 spirits brands and its brands include Johnnie Walker, Smirnoff, Captain Morgan, Baileys, Tanqueray, Guinness and many more. Diageo is based in the U.K., but U.S. investors can purchase a stake in the company through ADRs. One ADR equals four shares of the underlying company.

Diageo enjoys some key competitive advantages. The enviable strength of its brands offers the company strong pricing power while its immense distribution network results in great economies of scale and efficiencies. In addition, as the consumption of its beverages does not decrease significantly during rough economic periods, Diageo has proved resilient to recessions. The company remained highly profitable during the Great Recession and performed decently even in the fierce downturn caused by the pandemic in 2020. Despite the unprecedented lockdowns and other social distancing measures imposed in that year, Diageo saw its earnings per share decrease just 16%. It is also worth noting that the company has a rock-solid balance sheet, with an A- credit rating from S&P and an A3 credit rating from Moody’s.

Moreover, the company has fully recovered from the coronavirus crisis. In the most recent semester, Diageo grew its organic volumes by 9% and its net sales by 16% over the prior year’s period thanks to at least 13% growth in every single region. More than 80% of the portfolio maintained or gained market share. Thanks to its sustained business momentum, Diageo is expected by analysts to grow its earnings per share by approximately 18% this year, from $6.50 to a new all-time high of $7.69.

Anheuser-Busch InBev SA/NV (BUD)

Anheuser-Busch InBev SA/NV is the largest brewer in the world. The company was formed in 2008 with the merger of InBev and Anheuser-Busch and is majority owned by 3G Capital, which is well known for its expertise in the food & beverage business. AB InBev owns 61.8% of Ambev S.A. and produces, markets and sells more than 500 different beer brands around the world. The company has five of the top ten beer brands and 18 brands with over $1 billion in annual sales. It also has ~70% market share in Brazil and ~50% market share in the U.S. Its brand portfolio includes Budweiser, Stella Artois, and Corona.

AB InBev currently enjoys positive business momentum. In the third quarter of 2021, the company grew its revenue 7.9% over the prior year’s quarter thanks to a 3.4% volume increase and a 4.3% improvement in revenue per volume unit. Non-beer volumes grew 7.8%, much more than beer volumes, which grew 2.8%. Overall, the company is recovering strongly from the pandemic. It is expected to have grown its earnings per share by 48% in 2021 and is expected to grow its bottom line by another 13% this year.

On the other hand, AB InBev has some striking differences from Diageo. Its performance record is much more volatile than that of Diageo, partly due to the major acquisitions and divestments the company has executed over the years. In addition, AB InBev has a much more leveraged balance sheet, with Net Debt to EBITDA of 4.4. To cut a long story short, AB InBev is less resilient to recessions and has a less consistent business performance than Diageo.

Constellation Brands (STZ)

Constellation Brands was founded in 1945. It produces and distributes alcoholic beverages including beer, wine, and spirits, and has more than 100 brands in its portfolio. It is also the third-largest beer company in the U.S., importing and selling beer brands such as Corona, Modelo Especial, Modelo Negra, and Pacifico. In addition, Constellation Brands has many wine brands, such as Robert Mondavi and Kim Crawford.

Constellation Brands has proved resilient throughout the coronavirus crisis. In 2020, it incurred just a 2% decrease in its earnings per share. Even better, the company is now recovering strongly from the pandemic and is on track to post record earnings per share this year.

Moreover, Constellation Brands has an exceptional growth record. To be sure, the company has grown its earnings per share by 17% per year on average over the last decade. It has achieved such a strong performance by doubling its sales and by expanding its net profit margin from 12% to more than 22%.

However, it is prudent not to expect the company to keep growing at this breathtaking pace. On the bright side, the company is doing its best to enhance its margins by taking advantage of the premiumization of its brands. Overall, one can reasonably expect Constellation Brands to continue growing its earnings at a meaningful rate, albeit at a much slower pace than its historical pace.

Final Thoughts

The above three alcohol stocks pass under the radar of most investors due to their mundane business models. However, they can offer resilience during recessions and bear markets and can reward their shareholders with high returns in the long run. On the other hand, they are currently richly valued, partly due to the full valuation of the broad market. Therefore, investors should wait for a meaningful correction before purchasing these stocks.