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3 Beverage Stocks Adapting to Changing Consumer Tastes

Beverage companies are upgrading their operations to better meet changing consumer tastes. Amid this, quality beverage stocks Fomento Económico Mexicano (FMX), Diageo (DEO), and Heineken (HEINY) look well-positioned to adapt to the industry’s transformation. Read more…

As the demand for fizzy sodas or alcoholic beverages is unlikely to change drastically in accordance with the state of the economy, the companies in this space are poised to witness a consistent demand.

Thus, given the inherent stable nature of beverage stocks and their ability to generate solid returns in the long run, let’s look at fundamentally sound beverage stocks Fomento Económico Mexicano, S.A.B. de C.V. (FMX), Diageo plc (DEO) and Heineken N.V. (HEINY). As consumer preferences continue to evolve, these beverage stocks are adapting their products and strategies to remain competitive in the market.

Amid the rising recession concerns, beverage companies are expected to stay resilient due to their status as consumer staples. In addition, premiumization has become a significant trend in the alcoholic beverage industry, with consumers trading up for more expensive products.

Moreover, the industry has been benefitting from the cocktail culture, health and wellness (drinking less but more creatively), and its expansion into Ready-To-Drink (RTD) cocktails as another growth path. Due to its convenience, the global canned alcoholic beverages market is expected to grow at a CAGR of 16% between 2023 and 2033.

With continued product innovations to meet the changing consumer preference, the industry is well-positioned to soar in the upcoming years. According to Statista, worldwide revenue in the beverages segment is expected to grow at a CAGR of 12.8% to $380.50 billion by 2027.

In conclusion, beverage consumption will likely exhibit resilience even during a future economic recession thanks to its inelastic demand and significant brand value that helps deliver high-profit margins.

Given the backdrop, let’s look at the fundamentals of the featured stocks in detail.

Fomento Económico Mexicano, S.A.B. de C.V. (FMX)

Headquartered in Monterrey, Mexico, FMX operates as a bottler of Coca-Cola trademark beverages. The company produces, markets, and distributes Coca-Cola trademark beverages, including sparkling beverages. It operates through the following segments: Coca-Cola FEMSA; FEMSA-Comercio Proximity Division; FEMSA-Comercio Health Division; FEMSA-Comercio Fuel Division; Heineken Investment; and Other Business.

On March 9, the company’s Board of directors proposed an ordinary dividend amount of Mex $12.25 billion ($680.41 million), to be paid in 2023. This proposal represents an increase of 7.8% compared to the dividend paid in 2022.

FMX has a four-year average dividend yield of 1.86%, while its annual dividend translates to a 2.13% yield on its current share price. Its dividend payouts have grown at CAGRs of 4.2% and 4.9% over the past three and five years, respectively.

On January 23, FMX announced that through a wholly-owned subsidiary, it had signed an agreement with Concesionaria Vuela Compañía de Aviación, S.A.P.I. de C.V., to become the first third-party partner of FMX’s coalition loyalty program.

“This agreement is only the beginning as we are constantly working to add more partners to allow our customers to do and achieve more with their money,” commented Alejandro Gonzalez-Saúl, Director of Digital at FMX.

In terms of the trailing-12-month gross profit margin, the stock’s 37.38% is 18.84% higher than the 31.46% industry average. Likewise, its trailing-12-month EBIT and EBITDA margin of 8.63% and 11.41% are 13% and 6.2% higher than the industry averages of 7.64% and 10.74%, respectively.

FMX’s total revenue increased 23% year-over-year to Mex$186.47 billion ($10.36 billion) in the fourth quarter that ended December 31, 2022. The company’s gross profit rose 21% from the year-ago value to Mex$72.49 billion ($4.03 million), while its income from operations grew 12.2% from the prior-year quarter to Mex$17.41 billion ($961.01million).

Also, its EBITDA increased 13.3% from the year-ago value to Mex$26.56 billion ($1.48 billion).

Street expects FMX’s revenue and EPS for the first quarter (ended March 31, 2023) to increase 32.7% and 271.4% year-over-year to $9.57 billion and $2.08, respectively. Moreover, it surpassed the revenue estimates in each of the trailing four quarters.

Also, FMX’s revenue, EBITDA, and net income grew at CAGRs of 9.9%, 5.5%, and 4.9% over the past three years, respectively. Likewise, its total assets have grown at a CAGR of 7.8% in the same period.

Over the past nine months, the stock has gained 60.7% to close the last trading session at $95.01.

FMX’s POWR Ratings reflect this promising outlook. The stock has an overall B rating, which translates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

It has a B grade for Growth and Quality. In the 37-stock Beverages Industry, it is ranked #20. To see additional POWR Ratings for FMX for Value, Momentum, Stability, and Sentiment, click here.

Diageo plc (DEO)

DEO, based in London, United Kingdom, is an alcoholic beverage company that operates in various categories, including spirits and beer. It provides its products primarily under the Johnnie Walker, Guinness, Tanqueray, Baileys, Smirnoff, Captain Morgan, Crown Royal, Don Julio, Ciroc, Buchanan's, Casamigos, J&B, and Ketel One brands.

On April 17, the company launched a new Distillers Edition whisky range, featuring six award-winning liquid brands such as Speyside, the Highlands, the Lowlands Lagavulin, Talisker, and Cragganmore, offering a unique and distinct flavor profile that sets it apart from the traditional single malt whiskies.

The launch of the new range reflects DEO’s ongoing commitment to innovation and product development, as well as its focus on meeting the evolving tastes and preferences of its consumers.

On March 10, DEO acquired Don Papa Rum, a premium dark rum brand from the Philippines. This strategic move is consistent with DEO’s approach of acquiring brands with high growth potential and appealing profit margins that contribute to the premiumization trend in the beverage sector.

On January 26, the company reported that it had increased its interim dividend by 5% to 30.83 pence per share. DEO’s four-year average dividend yield is 2.15%, while its annual dividend translates to a 1.63% yield on the prevailing prices. Its dividend payouts have grown at marginal CAGRs over the past three and five years.

DEO’s net sales increased 18.4% year-over-year to £9.42 billion ($11.72 billion) for the six-month period that ended December 31, 2022. The company’s gross profit increased 15.9% and came in at £5.79 billion ($7.21 billion), while its operating profit grew 15.2% from the prior-year six-month period to £3.16 billion ($3.93 billion).

Its profit for the period stood at £2.41 billion ($2.99 billion), representing a 15.3% year-over-year increase. Also, its EPS increased 19.8% from the year-ago value to 100.60 pence.

Analysts expect DEO’s revenue and EPS for the fiscal year 2023 to increase 14.9% and 15.3% year-over-year to $21.61 billion and $8.41, respectively. Over the past three years, DEO’s revenue and net income have grown at CAGRs of 8.7% and 5.5%, while its EPS grew at a CAGR of 6.9% over the same period.

DEO’s trailing-12-month net income margin of 21.16% is 495.8% higher than the 3.55% industry average. Likewise, its trailing-12-month ROCE and ROTA of 45.31% and 9.24% compare with the industry averages of 10.57% and 4.26%, respectively.

The stock has gained 15.1% over the past six months to close the last trading session at $188.92.

It’s no surprise that DEO has an overall rating of B, which equates to Buy in our proprietary rating system. It also has a B grade for Stability and Quality. Within the same A-rated industry, it is ranked #19 of 37 stocks.

In addition to the POWR Ratings we stated above, we also have DEO’s ratings for Growth, Value, Momentum, and Sentiment. Get all DEO ratings here.

Heineken N.V. (HEINY)

Headquartered in Amsterdam, Netherlands, HEINY engages in the brewing and selling of beer and cider. It also provides soft drinks and water. It offers its beers under the Heineken, Amstel, Sol, Tiger, Birra Moretti, Pure Piraña, Desperados, Edelweiss, and Lagunitas brands.

On March 15, the company was recognized as a leading supplier engagement performer on the CDP's 2022 Supplier Engagement Leader board. This recognizes HEINY’s strong commitment to sustainability, responsible sourcing, and supplier engagement practices. HEINY's recognition on the CDP leaderboard reflects its ongoing efforts to drive positive change and sustainability across its operations and supply chain.

In the same month, HEINY received approval from the South African Competition Tribunal to acquire a controlling stake in South Africa's largest wine and spirits producer Distell, as well as Namibia Breweries Limited. The acquisition is expected to enable HEINY to expand its presence in the African market and offer a wider range of products to consumers in the region.

The company’s annual dividend of $1.31 translates to a 2.33% yield on the prevailing prices, while its four-year average dividend yield is 1.43%.

HEINY’s net revenue increased 30.49% year-over-year to €28.72 billion ($31.55 billion) for the fiscal year that ended December 31, 2022. The company’s net profit and EPS came in at €3.04 billion ($3.34 billion) and €4.65, respectively, for the same period. Its cash flow from operating activities grew 7.5% from the prior year to €4.49 billion ($4.94 billion).

In addition, its total current assets increased 15% year-over-year to €11.02 billion ($12.10 billion), compared to €9.58 billion ($10.52 billion) as of December 31, 2021.

In terms of trailing-12-month, HEINY’s net income and levered FCF margins of 9.34% and 7.34% are 162.9% and 220.14% higher than the 3.55% and 2.29% industry averages. Also, its trailing-12-month EBITDA margin of 19.15% compares with the industry average of 10.74%.

Analysts expect HEINY’s revenue for the second quarter (ending June 30, 2023) to increase 34.7% year-over-year to $9.32 billion. For the fiscal year 2023, its EPS and revenue are expected to reach $2.90 and $34.98 billion, indicating a 16.2% and 14.1% year-over-year increase, respectively.

The stock’s revenue and net income grew at CAGRs of 6.2%and 7.4% over the past three years, respectively. Likewise, its EPS grew at a 7.2% CAGR over the same period.

HEINY’s shares have gained 32.5% over the past six months to close the last trading session at $56.37.

HEINY’S strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which equates to Buy in our proprietary rating system.

It has a B grade for Stability. In the same industry, it is ranked #18 out of 37 stocks. Click here to see the other ratings of HEINY for Growth, Value, Momentum, Sentiment, and Quality.

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REVISED: 2023 Stock Market Outlook > 

FMX shares were trading at $95.28 per share on Monday afternoon, up $0.27 (+0.28%). Year-to-date, FMX has gained 21.97%, versus a 8.13% rise in the benchmark S&P 500 index during the same period.

About the Author: Shweta Kumari

Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.


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