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Players in the Zacks Beverages – Alcohol industry are grappling with inflation and rising costs for commodities and logistics, leading to increased operational expenses from heightened advertising and marketing spend. These elevated costs are likely to persist and may squeeze the profit margins of alcohol producers.

Despite these challenges, the industry is benefiting from the demand for premium, high-quality products and innovative spirits. Strong momentum in spirits and ready-to-drink (RTD) cocktails is driving growth. Investments in product innovation, premiumization and technology platforms position companies like Anheuser-Busch InBev BUD, Constellation Brands Inc. STZ, Molson Coors TAP, The Boston Beer Company Inc. SAM and The Duckhorn Portfolio NAPA for continued success.

About the Industry

The Zacks Beverages – Alcohol industry mainly comprises producers, importers, exporters, marketers and sellers of alcoholic beverages like beer, craft beer, ciders, wine, rum, whiskey, liqueurs, vodka, tequila, champagnes, brandy, amaretto, RTD cocktails and malt. Some industry players also produce and sell non-alcoholic beverages like carbonated soft drinks, sparkling waters, bottled water, energy drinks, powdered and natural juices, and RTD teas. The companies sell products through wholesalers and retailers like supermarkets, warehouse clubs, grocery stores, convenience stores, package stores, drug stores and other retail outlets. The industry participants also sell beer directly to consumers in cans and bottles at restaurants, pubs, bars and liquor stores. Some brewers operate brewpubs or taste rooms at breweries, offering consumers the freshest beer.

What's Shaping the Future of Beverages - Alcohol Industry

Elevated Costs: Players in the alcohol industry have been enduring pressures from the ongoing impacts of inflationary labor, transportation and commodity costs. The industry players have been experiencing elevated ingredient and other input costs. Fluctuating prices of raw materials, such as grains and fruits, have been the key deterrents. Additionally, elevated expenses for shipping and freight, labor, trucking, fuel, co-packing fees, and secondary packaging materials have been leading to increased costs of sales and higher operating costs. These have been resulting in adverse gross and operating margins for beverage companies.

Apart from elevated input and packaging costs, players in the alcohol industry are anticipated to witness higher advertising and promotional expenses, as well as SG&A expenses, further threatening profitability. Rising brand investments, particularly in media, advertising, production and local marketing, and increased freight to distributors due to higher volumes are resulting in elevated advertising, promotional and selling expenses. Growing external costs, increased compensation expenses and higher discretionary spending are expected to drive SG&A deleverage. Most industry players expect the trend to continue in the near term, impacting profitability to some extent.

E-Commerce Development & Pricing Gains: Alcohol companies are capitalizing on growth of e-commerce and market recovery, leading to increased volumes. Investments in online and e-commerce platforms have become more significant, with companies adopting advanced technologies to enhance customer engagement. The expansion of digital capabilities and market recovery position alcohol companies well for growth. Price increases and supply productivity savings are helping counteract cost inflation. Strong marketing strategies and effective commercial execution are also driving sales for alcohol beverage companies.

Premiumization & Product Diversification: Premiumization has been driving growth in the alcohol sector as consumers seek new and refreshing tastes. Beverage companies are expanding their product lines to capture more sales, with a notable increase in demand for premium and high-end products. The market is evolving, with a rise in craft spirits, low-alcohol and non-alcoholic options. This transformation has led companies to explore beyond traditional categories like beer, whiskey, spirits and wine. Popular trends now include RTD spirits, such as canned wine and cocktails, hard seltzers, cider, and flavored malt beverages. To align with consumer preferences, companies are focusing on innovation and new product offerings.

Zacks Industry Rank Indicates Dull Prospects

The Zacks Beverages – Alcohol industry is a 17-stock group within the broader Zacks Consumer Staples sector. The industry currently carries a Zacks Industry Rank #222, placing it at the bottom 11% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dull near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential.

Before we present a few stocks that you may want to consider for your portfolio, let us take a look at the industry’s recent stock-market performance and valuation picture.

Industry Underperforms S&P 500

The Zacks Beverages – Alcohol industry has underperformed the broader sector and the S&P 500 in the past year.

The stocks in the industry have collectively declined 14% in the past year, while the Zacks Consumer Staples sector has risen 5.5%. Meanwhile, the Zacks S&P 500 composite has rallied 30%.

One-Year Price Performance

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What are the Zacks Style Scores?

Developed alongside the Zacks Rank, the Zacks Style Scores are a group of complementary indicators that help investors pick stocks with the best chances of beating the market over the next 30 days.

Each stock is assigned a rating of A, B, C, D, or F based on their value, growth, and momentum characteristics. Just like in school, an A is better than a B, a B is better than a C, and so on -- that means the better the score, the better chance the stock will outperform.

The Style Scores are broken down into four categories:

Value Score

Finding good stocks at good prices, and discovering which companies are trading under their true value, are what value investors like to focus on. So, the Value Style Score takes into account ratios like P/E, PEG, Price/Sales, Price/Cash Flow, and a host of other multiples to highlight the most attractive and discounted stocks.

Growth Score

While good value is important, growth investors are more focused on a company's financial strength and health, and its future outlook. The Growth Style Score takes projected and historic earnings, sales, and cash flow into account to uncover stocks that will see long-term, sustainable growth.

Momentum Score

Momentum investors, who live by the saying "the trend is your friend," are most interested in taking advantage of upward or downward trends in a stock's price or earnings outlook. Utilizing one-week price change and the monthly percentage change in earnings estimates, among other factors, the Momentum Style Score can help determine favorable times to buy high-momentum stocks.

VGM Score

If you like to use all three kinds of investing, then the VGM Score is for you. It's a combination of all Style Scores, and is an important indicator to use with the Zacks Rank. The VGM Score rates each stock on their shared weighted styles, narrowing down the companies with the most attractive value, best growth forecast, and most promising momentum.

How Style Scores Work with the Zacks Rank

The Zacks Rank, which is a proprietary stock-rating model, employs earnings estimate revisions, or changes to a company's earnings expectations, to make building a winning portfolio easier.

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This totals more than 800 top-rated stocks, and it can be overwhelming to try and pick the best stocks for you and your portfolio.

That's where the Style Scores come in.

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Since the Scores were created to work together with the Zacks Rank, the direction of a stock's earnings estimate revisions should be a key factor when choosing which stocks to buy.

A stock with a #4 (Sell) or #5 (Strong Sell) rating, for instance, even one with Scores of A and B, will still have a declining earnings forecast, and a greater chance its share price will fall too.

Thus, the more stocks you own with a #1 or #2 Rank and Scores of A or B, the better.

Stock to Watch: Boston Beer (SAM)

Founded by Jim Koch, Harry M. Rubin, and Lorenzo Lamadrid in Boston, MA in 1984, Boston Beer Co. Inc. is one of the largest craft brewers in the United States. Boston Beer produces beer, malt beverages, and cider products at company-owned breweries and under contract. The company sells alcoholic beverages in the United States, Canada, Europe, Israel, Australia, New Zealand, the Caribbean, the Pacific Rim, Mexico, and Central and South America through a formidable network of wholesale distributors.

SAM is a #3 (Hold) on the Zacks Rank, with a VGM Score of A.

Momentum investors should take note of this Consumer Staples stock. SAM has a Momentum Style Score of B, and shares are up 5.4% over the past four weeks.

Two analysts revised their earnings estimate upwards in the last 60 days for fiscal 2024. The Zacks Consensus Estimate has increased $0.25 to $9.97 per share. SAM boasts an average earnings surprise of 154.6%.

With a solid Zacks Rank and top-tier Momentum and VGM Style Scores, SAM should be on investors' short list.

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