Beer prices on rise - but 'beer-stocks' lag behind

The world's biggest beer festival, Oktoberfest, kicked off in Munich on Saturday. Over the coming weeks, participants wearing lederhosen and dirndl will be raising their beer mugs at prices 3.9% higher than last year's festival.

Since the inflation crisis in 2022, beer prices have outpaced general price increases. Higher raw material costs, which rose sharply in 2022-2023, are one of the main reasons. Added to this is the long-standing effort by breweries to 'premiumise' beer to increase profits. The strategy, which focuses on promoting premium brands to boost margins, has been particularly important in mature markets like Europe, where beer sales are stagnant.

It would be expected that rising beer prices would lead to solid share price increases for breweries, but the reality has been different. We analysed nine global brewery stocks, including European giants Carlsberg (CSE:CARLa), Heinekenm , AB InBev, Diageo (LON:DGE) and Americans such as Molson and Constellation Brands.

Despite beer price increases, brewery stocks have seen an overall decline of 11% over the past five years. Only four out of nine breweries have delivered positive returns.

The past five years have been challenging for breweries. First, the pandemic lockdowns hit, putting an end to lucrative high-margin beer sales to bars and restaurants. Next came the inflation crisis, which saw significant increases in breweries' raw material and energy costs, while consumers were squeezed by the rising cost of living. This is evident in breweries' gross margins, which have fallen from 49% to 46% on average among the nine companies analysed.

If breweries manage to restore their margins to previous levels, there is potential for growth in earnings and share price. There are indications that this could happen. At least Carlsberg's latest half-year report shows an increase in gross margin to 46.3% from last year's 44.7%. Although this is still below the 2019 level of just under 50%, management has announced that they are working to rebuild margins through a focus on procurement and supply chain optimisation.

The breweries' underperformance on the stock market over the last few years has also meant that the shares are now more attractively valued. The average Price/Earnings multiple of the nine breweries is now around 15x, which is about 25-30% below the level in early 2022.

Improving margins and valuation could strengthen brewery stocks going forward. However, as investors, we should not expect wild price increases. Instead, long-term investors can benefit from their nature as value stocks that typically deliver moderate but stable growth and an annual dividend.

eToro Market Analyst, Jakob Westh Christensen