Sign of Deepening Recession

As if the constant barrage of troubling macroeconomic news was not enough to tip you off, now something truly appalling has come to our attention. No, it isn’t the new unemployment statistics, credit spreads, the latest report on retail sales, declining home prices, or even producer prices but the newest sign of economic weakness comes from the reports out of the world’s second largest brewer SABMiller plc. The maker of some of the best selling adult beverages reported that shipments have fallen in the third quarter with demand dropping most in the U.S. and European markets. The results are troubling because they goes against the conventional wisdom that brewers are particularly resistant to recessions. The logic being that as economies get worse people will be more inclined to drowned their sorrows in their favorite, relatively inexpensive beer. Up until this latest report, the conventional wisdom seemed to be holding true.

Brewery ChartConsumers of beer are now cutting back on purchases as they are conserving cash in fear of an ever worsening economy. This could possibly be attributed to a decline or scaling down of holiday gatherings or just severe declines in drinking while out at restaurants and bars. The joint venture of MillerCoors in the U.S. saw sales decline 2.3%. Even more distressing, the company’s flagship beer, Miller Lite, sold 7.5% less in the quarter, while Coors Lite picked up 1% in sales which is actually slower than its recent growth trend. The company’s “premium lite” category saw a drop-off of 2.4%. Interestingly, craft and import sales grew 1.6%, buoyed by double digit growth in the Blue Moon brand. There is a burgeoning craft beer culture that approaches wine in its sophistication, perhaps this group is less sensitive to the economic current.

Europe is also feeling the effects as Carlsberg has announced plans to cut jobs as the economic challenges worsen. The company plans to accelerate its restructuring efforts first announced in 2008. MillerCoors is reporting a 22% drop in sales for its Russian market, although they have always been more of a Vodka culture. It certainly seems that Anheuser-Busch was bought at a great time for their shareholders. Readers will recall that we were very optimistic about the InBev acquisition of Anheuser-Busch from the BUD shareholders perspective. Well, since the merger was consummated in November the new company (Anheuser-Busch Inbev NV (ABI)) is down by about 30%.

What does this all mean? Unfortunately, that no area of the economy is going to remain unscathed by this already 13-month long recession. We have known for some time that investor sentiment is as bearish now as it has been in decades, but this is yet more evidence that consumers are extremely pessimistic as well. Ockham Research is slightly negative on the 7 brewers that we cover, as you can see from the industry scatter plot. These companies have been helped by the prevailing sentiment as discussed earlier that brewers are resilient to downturns, but as of this latest data that theory is starting to show cracks. For further proof, the kegerator at our office here at Ockham has been empty for the last few weeks: now this is getting serious!

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Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

We utilize this straightforward approach to value over 5500 securities, with key emphasis given to the study of individual securities' price-to-sales, price-to-cash earnings and other historical valuation ranges. Our long term value investing methodology is powered by the teachings of Ben Graham and it has proven to be very adept at identifying stock prices that are out of line with fundamental factors.

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