Independence Day Revelry Optimism Fans Bets on Beer Stocks

(Bloomberg) -- Fourth of July means fireworks, barbeques and beer -- lots of beer -- and analysts are betting on the stocks of brewers as they push new flavors and high-end products ahead of the holiday.

The three largest U.S. beer companies by market capitalization -- Constellation Brands Inc., Boston Beer Co. and Molson Coors Beverage Co. -- have all rebounded from the hit they took at the start of the Covid-19 pandemic last year and analysts see room for more gains.

The stocks “are trading below where we think that they should be given the fundamental growth characteristics that each of them has,” said Trevor Stirling, an analyst at Bernstein.

Bernstein has outperform ratings on the three and has a 12-month price target of $305 for Constellation, $74 for Molson Coors and $1,340 for Boston Beer -- all at least 30% above their current levels. Meanwhile, Guggenheim Securities named Boston Beer a new “Best Idea” last week on its compelling valuation.

The average of analysts' price targets have been climbing over the past six months, but “it's a very different story for each,” Stirling said. He predicted Constellation's continued expansion of its popular beer brands like Modelo will benefit shareholders.

Beer sales climbed 14% in the first quarter from a year earlier to $1.57 billion, Constellation reported Wednesday. The company boosted its fiscal 2022 forecast for earnings per share, which helped drive the stock up 1.3% that day.

“There's a lot of pent up consumer demand to simply go out of your home,” Chief Executive Officer Bill Newlands said on a earnings conference call.

While people are returning to bars and restaurants, they're still consuming more beer and hard seltzer at home than they did before the Covid-19 pandemic began, according to data compiled by the Bureau of Economic Analysis. But socializing outside the home has been picking up pace alongside the vaccine rollout in the U.S., said Ken Shea, an analyst at Bloomberg Intelligence.

Memorial Day sales broadly met or exceeded expectations of 75% of distributors, according to a recent Goldman Sachs & Co. survey. Anticipation is now building for the long Independence Day weekend, where distributors typically see high sales as Americans nab six-packs to watch the fireworks.

“Consumers are clearly in a celebratory mood, evidenced by their drinking more at bars -- and at home,” Shea said.

Analyst Laurent Grandet at Guggenheim said strong growth in Boston Beer's hard seltzer line underpins the firm's position. The brand's newest offering, Truly Punch, went national in May.

Seltzer Slowdown

That confidence comes at a time when off-premise sales of hard seltzer have slowed on a year-over-year basis, according to a Bloomberg Intelligence analysis of IRI data. Shea says that trend may be associated with a recovery in traffic at restaurants and other on-premise locations, because the popularity of hard seltzer is predominantly from at-home channels.

Boston Beer has one sell recommendation and Constellation has none, while Molson Coors has five, accounting for about 23% of analysts who cover the company, according to data compiled by Bloomberg. Molson Coors's stock crossed below the Bollinger Band in mid-June, a technical level that indicates it may have been oversold.

Goldman Sachs analyst Bonnie Herzog, who rates the company a sell, last month cited distributor skepticism on the brewer's shift away from the economy beer segment, as well as its delayed entry into hard seltzer and “its overall long tail of underperforming brands.”

Bernstein's Stirling says he expects growth will improve at Molson Coors as the effects of the pandemic ease more.