Home > Stock Analysis

Dethroning The King Of Beers

Posted: Oct 18, 2007 15:50 PM by Wayne Pinsent

Tickers in this Article: INBVF, SBMRY, BUD, TAP

Molson Coors (NYSE:TAP) and SABMiller (OTC:SBMRY) are making strategic moves to compete with the long-dominant "King of Beers" Anheuser-Busch (NYSE:BUD).

Get Free Stock Analysis By Email

The pair plan to combine operational forces to cut costs at both brewers simultaneously. The big question is will the move allow Molson Coors and Miller to steal some of Bud's liquid lunch?

Crying In Their Beer
In a recent article, I mentioned the stability in stocks tied to vices. Even in bad economies people don't tend to give up their alcohol and cigarettes. (To read that full article, see Drink Through The Good Times, Drink Through The Bad.)

However, this doesn't mean that there is incredible growth in the sector. The Beer Institute, a group that monitors the industry, expects total U.S. beer sales to rise just 1.5% this year. This puts all the major brewers in a tough spot, but makes it even harder for Miller and Molson Coors to compete with giant Anheuser Busch that controls 48% of the market share.

Behind The Scenes Saving
What to do in a time like this? Cut costs. Miller and Molson Coors are doing precisely that by signing a letter of intent to combine their operations, which will be called MillerCoors. This move is expected to begin producing annual savings of $500 million within three years.

I view this as a very smart idea for the companies. While SABMiller is ahead of Anheuser-Busch by market cap and production volume worldwide, BUD's brands in the U.S still pose a strong challenge. The combination will help both Miller and Molson Coors have a strategic advantage going forward. This move will not affect the actual brands or any facet that consumers will see, but instead cut down on background costs like transportation and distribution. The companies will be able to maintain their identities while benefiting from these consolidations.

This Bud's For You
What does this mean for Anheuser-Busch? Well this deal is similar to one BUD already has with InBev SA (OTC:INBVF). That means BUD has already taken advantage of this type of an opportunity. There should be opportunity for BUD to benefit from Miller and Molson Coors being sidetracked during the consolidations. These will be short-term benefits though, and will most likely see increased competition in the long term. I would not be surprised if Anheuser-Busch looks to further their partnership with InBev in the future.

The Bottom Line
Shares of Molson Coors have jumped close to 10% since the deal was announced. With the transition problems Molson Coors and Miller will face in the short term, investors may be better waiting on these stocks in the near term. Especially with the projected slow growth in the beer industry. This growth factor combined with future pressures cause me to be wary of Anheuser-Busch shares as well.

Looking to cook up a market-stomping stock portfolio? Check out our FREE report "7 Ingredients to Market Beating Stocks" and get started right now!

By Wayne Pinsent

Rate this Article: Your Rating: Overall Rating: Vote Now!

MORE STOCK ANALYSIS