Amsterdam, Aug 25 - Heineken shares have fallen by almost a third this year as investors punish the Dutch brewer for its heavy exposure to mature Western markets, but analysts see the weakness as overdone given good long-term prospects for premium brand beers.
The credit crisis, waning consumer confidence and smoking bans have all taken their toll on beer sales in Western Europe and the United States, but the thirst for trendy, pricier brands -- among which Heineken is one of the most universally recognised -- remains strong. While the world's third-largest brewer works to integrate assets it acquired from Britain's Scottish & Newcastle (S&N) and struggles to absorb higher input costs, the discount its shares now offer to peers such as Carlsberg and InBev could provide a buying opportunity even if top-line growth rates may look less than impressive for now.
Analyst Marcel Hooijmaijers at Landesbanki/Kepler, who rates the stock a "buy" despite having slashed his target share price to 37 euros from 54 euros, said the stock trades at a discount of about 20 percent compared to other major brewers.
"A certain discount is justified given the more favourable emerging market profile of other brewers," but he adds: "A 10 percent discount to the sector seems more justified than the current 20 percent."
This makes the stock attractive at current levels of around 32 euros, giving Heineken a market value of 15.4 billion euros ($23 billion). The share closed on Friday at 31.88 euros.
Heineken trades at around 13.7 times projected 2009 earnings compared to 15.1 for Carlsberg, 14.2 for InBev, maker of Stella Artois and Beck's, and 15.8 for Diageo, which owns Guinness, according to Reuters data.
Last week, Heineken warned that declining consumer confidence had cast doubt on whether its acquisition of S&N assets would benefit its earnings in 2009. The brewer is set to report first-half results on August 27.
Both Carlsberg's and Heineken's share price suffered after their 7.8 billion pound ($14.6 billion) takeover of Britain's S&N earlier this year, but Carlsberg looks to have emerged from the deal the better after acquiring S&N's Eastern European assets including control of Russian brewer Baltika.
Russia in particular has seen strong growth as drinkers switch to beer from vodka and a newly rich urban elite looks for trendy foreign drinks.
Carlsberg posted a larger-than-expected 68 percent rise in second-quarter operating profit earlier this month, despite price rises in raw materials such as barley, aluminium and glass.
Its shares rose almost 16 percent on the day in their biggest one-day gain in 23 years.
The outlook for Heineken is more modest. It is expected to post a 6.5 percent increase in first-half operating profit on Wednesday after a 14 percent rise in sales in the period.
Despite this, long-term sentiment is largely positive supported by Heineken's cheap valuation. Of 26 analysts following the stock, 12 have a "buy" or "outperform" rating, 11 a "hold" rating and only 3 an "underperform".
At a time of industry consolidation, typified by InBev's planned acquisition of Budweiser beer maker Anheuser-Busch Cos Inc for $52 billion, Heineken's family ownership structure prevents it from being a takeover target.
EXPENSIVE TASTES
"The key strength for Heineken is the well-known premium status of its global brand," said Hooijmaijers.
Heineken has reduced its brand portfolio over recent years to focus on more marketable beers, and it is anxious to improve its standing in Britain, the eighth largest beer market in the world, but where it had only a 1.1 percent market share until its takeover of S&N's British business in April.
Volumes of Heineken increased by 20 percent in Britain in 2007 so momentum is strong and consumer acceptance of the premium positioning of Heineken is increasing, the company said in its annual report.
Heineken has struggled to shed its image as a standard beer in the UK after it was brewed by Whitbread at a lower 3.4 percent alcohol content since the 1970s. It replaced the beer with its traditional 5 percent brew earlier this decade.
But it now has access to S&N's distribution facilities and Hooijmaijers notes it could profit from a UK market for premium beers growing by 4-5 percent in volume terms, while the overall beer market shrinks.
"The success of imported beer stems from consumer attraction to new products, but also from immigration and foreign travel. However, imported beer does not seem to be attracting new consumers to the market, rather it is cannibalising domestic brands," said Hooijmaijers.
In emerging markets premium beers are also enjoying buoyant growth as disposable incomes and lifestyle aspirations increase.
"Premiumisation gives Heineken comfort," said ING analysts.
"When executed in the right way premium sales are supported by irreversible growth factors," they said, noting at a time of rising input costs, it is easier to protect margins on premium brands.