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The beer industry’s pricing battles have ended, sparing their biggest casualty: profits. A number of mergers and acquisitions have turned what used to be a World War I-style battle for inches – in earnings, store shelf space, etc. – into a “virtual oligopoly,” Cramer said Friday.
The result has been increased numbers for companies across the board, even despite shrinking sales. People aren’t drinking more, but the InBevs [BUD
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], SABMillers and Molson Coors [TAP
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] of the world sure are making more. Molson Coors saw a decline in shipments last quarter in Canada, the UK and the US, but pricing “is up huge” in these areas, Cramer said. As much as 20% in the UK.
Take this industry shift, add a drop in raw and distribution costs, and “you have the making of some great multiyear profits,” Cramer said. He picked Molson Coors as the best play on the trend.
Not only did TAP enjoy those prices increases, but it beat earnings expectations by 14 cents a share last quarter. Also, the company is seeing “major cost savings” from its joint venture with SABMiller, where the two have combined their US brewing operations.
Even after the summer season, both pricing and volumes are holding up for that JV, and prices are expected to rise over the next six months. The increases look like they’ll carry over to Canada and the UK, too. And BUD’s intention to raise prices in October and February gives TAP permission to do the same.
Another way to play the beer biz, Cramer said, is through Altria [MO
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], which offers a 7.6% dividend yield. MO still owns about 29% of SAB Miller, a stake for which Altria doesn’t get full credit in its share price, Cramer said. But an industry rebound should rectify that.
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Also, Altria has both shrugged off talk that it would cash out its remaining SAB holdings and said that it would reevaluate its options in early 2010. If MO sells and uses the money to buy back stock, that could boost the earnings per share by as much as 5%, Cramer said, and probably translate into a higher multiple as well. This is a big reason his charitable trust has been loading up on the stock.
The bottom line, though, is that competition has given way to communion in the beer industry, as companies raise prices without fear of hurting profits. Investors who want to generate some profits of their own, Cramer said, should buy Molson Coors or Altria.
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