Booze May Be Recession Proof, But It’s Not Currency Proof

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February 13, 2009

Liquor, casinos, guns, and butter. All are supposed to be recession proof industries - great investments when times are tough. The problem is, that’s not good enough when you’re an international beer company, and relying on brisk overseas sales.

By now you may be aware Molson Coors (TAP) had a poor quarter. Year-over-year earnings fell 44%, from 94 cents to 52 cents. The market of course sent shares into a tailspin.

The selloff was probably deserved, but not for the conclusions jumped to by most investors. What really happened wasn’t quite as bad as it may seem on the surface. In the same quarter, Molson also paid for a big chunk of the cost of the MillerCoors co-venture. Once the one-time charges and discontinued operations charges are stripped out, earnings only fell from 73 cents to 57 cents. That’s only a dip of 22%, which still isn’t great, but isn’t bad either.

What the market really didn’t grasp was the effect of a rising dollar. In short, a stronger dollar hurt results, as a great deal of Molson’t business is international business. In fact, the company says about 55% of the earnings decline (about 10 cents of the adjusted 16 cent loss) is due to currency fluctuation. So, one could argue that earnings really only fell about 6 cents….. though I’m not one who would actually make that argument.

From my perspective, a loss is a loss is a loss. The reason is irrelevant. I don’t harbor any ill-will towards Molson, but as an investor, I also have to call a spade a spade.

None of this is really my point though. My point was to highlight how a stronger dollar is taking a real toll. As investors, we should respond to that.

In Molson’s case, considering globel been consumption trends rarely waver, I think it would be wise to start looking at Molson’s competitors that don’t have a problem with a strong dollar. Of course, those are foreign brewers. Their beer prices are now far better to their local consumers than Molson’s prices are.

I name two specific foreign brewers I like in my recent Motley Fool article “Is Molson’s Bottle Half Full or Half Empty?” You can get more details about the whole message there.

Anyway - and as always - I want to post a chart of the brewer industry and its components. Very few sites, including Motley Fool, really lend themselves to my stock picking style which is based equally on charts and fundamentals. However, I think it’s important to know not just what your stocks “should” be worth, but whether or not they’re actually moving that direction. (You only make money if your stock goes higher, regardless of whether it’s undervalued or not.)

Here’s the S&P 1500 Brewers Index.

S&P 1500 Brewer Industry

Needless to say, these stocks have been getting crushed starting at the beginning of the year. Relentless. Based on the sharp decline alone I’d be interested in seeing if any of these names are poised for a short-term pop. How did things get so bad so fast?

Here are the individual stocks’ percentage changes for the entire beverage (brewers + soft drinks) industry, also starting at the same time … at the beginning of the year. The tickers are listed/ranked to reflect their year-to-date results. Coca Cola Enterprises (CCE) looks like it’s breaking away, while Molson (TAP) was struggling even before the bad news was out.

Boston Beer’s (SAM) strength surprises me, though the broad weakness of the other alcohol stocks also surprises me for the opposite reason.

This chart isn’t particularly telling. Usually there’s more intra-industry divergence than this, but now there’s not a clear leader from any segment (except, ironically, Boston Beer).

Bottom line - this is still a shaky industry. I picked a couple for foreign brewers for fool.com, and I feel good about them. However, those two foreign brewers are also a hedge against further rises in the dollar’s value. The other companies represented on this chart are apt to experience problems comparable to Molson’s.

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