Beer finds favour over spirits in slow recovery

A customer poses for the camera with a pint of beer in a public house in Leeds, northern England October 13, 2008.

LONDON (Reuters) - Big brewers like Anheuser Busch InBev are seen as a better bet than spirit giants Diageo and Pernod Ricard to gain from the uneven world recovery in which only emerging markets are showing strong growth.

The brewers are slaking more thirsts in Latin America, Asia and Africa as drinkers turn first to beer rather than more expensive spirits as economic growth picks up, while fears over a big jump in the price of grain to make beer are overdone.

Meanwhile, the big spirits groups have less exposure to emerging markets than the beer companies and have struggled with weak European sales, especially in Spain and Greece, and as drinkers have sought out cheaper whisky and vodka in recession.

Pernod (PERP.PA) has shown stronger profits growth than its bigger rival Diageo (DGE.L) but its share performance has been dull compared with the big brewers who have seen a big boost from buoyant beer markets in places as far apart as Brazil and China.

"We struggle to see why the marginal buyer would prefer spirits and Pernod to beer and AB InBev," said analyst Rob Mann at brokers Collins Stewart.

Analyst Mike Gibbs at JP Morgan Cazenove says he continues to prefer the brewers to the distillers and believes AB InBev <ABI.BR deserves a significant premium to reflect its low risk, very strong cash flow and improving top line sales outlook.

The world's top four brewers AB InBev, SABMiller (SAB.L), Heineken (HEIN.AS) and Carlsberg (CARLb.CO) already trade on a premium to the globe's top two spirits group Diageo and Pernod, and some think the gap could widen further.

Belgium-based AB InBev, the brewer of Budweiser, Stella Artois and Beck's, has a 50-50 earnings split between emerging and mature markets and has bought forward its grain need for 2010 and 2011 which protects it from higher input costs.

Its exposure to mature markets is heavily weighed to the United States which accounts for 42 percent of group profit and although beer volume growth is sluggish there, the group expects to raise beer prices in the second half of this year.

Analysts say modest sales growth at the group will be translated into strong double digit earnings growth by cost savings and debt reduction following its $50 billion (32.4 billion pounds) acquisition of U.S. brewer Anheuser Busch in November 2008.

Other brewers are upbeat with Miller Lite and Peroni brewer SABMiller, which earns over 80 percent of its profits from emerging markets, saying its beer volumes turned positive in June, while Heineken will gain from its acquisition of Mexican brewer FEMSA and Carlsberg from better trading in Russia.

This has seen AB InBev shares trade at 17.5 times forecast 2010 earnings, with SABMiller on 16.6, Heineken on 14.6 and Carlsberg 15.9, all ahead of Pernod and Diageo on 14.2 and 13.9 for their financial year to end-June 2011.

Analysts say the four big brewers have larger exposure to fast-growing emerging markets than the two spirits groups and higher underlying sales growth while they have been quick to slash costs and put up price in West Europe and North America.

Both Diageo and Pernod only have around one third of their sales in emerging markets and have struggled in the tough markets of southern Europe like Spain and Greece and see little uptick in the big United States spirits market.

Both showed underlying sales growth of 2 percent in their financial years to end-June 2010, but Pernod translated that to a 4 percent operating profit growth compared with Diageo's 2 percent helped by the French group's bigger exposure to fast-growing Asian markets.

Analysts say Pernod's higher profit growth compared with Diageo is offset somewhat by concerns over its debts of 10.6 billion euros which were heightened by its takeover of Absolut vodka maker Vin & Sprit in 2008. Diageo, which has a market value twice that of Pernod, has debts of almost 7 billion pounds.

Graeme Eadie at UniCredit Bank is another analyst to favour the brewers as he sees them as less risky stocks with better growth prospects.

"While Pernod appears to be weathering the economic downturn better than its spirits peers, we still think it is too early to be positive on the stock given the high level of debt and the prospect of modest organic profit growth," Eadie said.

(Editing by David Cowell)