CHICAGO--(BUSINESS WIRE)--Zacks.com releases the latest Zacks Industry Rank. Stocks featured in this week’s analysis includes Anheuser-Busch (NYSE: BUD), Boston Beer (NYSE: SAM), Molson Coors (NYSE: TAP), Shire PLC (Nasdaq: SHPGY) and UTD Therapeutic (Nasdaq: UTHR). To see the Zacks Industry Rank and the trend in earnings estimates revisions for more than 200 industry groups, visit http://at.zacks.com/?id=3154.
Zacks Industry Rank Analysis is written by Charles Rotblut, CFA, Senior Market Analyst for Zacks.com.
Drinking a cold one is about to get more expensive. Hops, a key ingredient in beer, are in short supply. The Brewer's Association (an organization that represents microbrewers in the U.S.) estimates that hop production is 10-15% below current demand.
Mother Nature and farmers are to blame for the shortage. Weather conditions in Europe and Australia have hurt crops this year. Previous overproduction led farmers to curtail the amount of acreage devoted to growing hops. At the same time, higher demand for biofuels such as ethanol have made other crops (e.g. corn) more profitable for farmers. (The Brewer's Association estimates that worldwide hop acreage has decreased by 50% over the last 10 years.)
Boston Beer (NYSE: SAM) partially blamed the higher cost of hops for hurting profit margins. The brewer missed third-quarter expectations by three cents per share and lowered its guidance for full-year earnings. SAM expects 2007 per share profits to be in a range of $1.40 to $1.65; it had previously guided for profits between $1.42 and $1.70 per share. The company also warned rising ingredient costs would adversely affect margins in 2008.
The hops shortage is expected to primarily impact microbrewers. It should have a lesser impact on the major brewers, who may be able to exert greater pricing power.
Anheuser-Busch (NYSE: BUD) experienced a drop in gross margins during its third-quarter, but intends to "implement price increases on the majority of its U.S. beer volume in early 2008, with increases in several states in the fourth quarter 2007".
Molson Coors (NYSE: TAP) has also been pushing through higher prices, but also relied on cost-cutting measures to offset higher ingredient costs.
The impact of brewer size is apparent in how brokerage analysts are adjusting their forecasts for 2008. Last week, two of the three covering analysts cut their profit projections on SAM (the other analyst did not change his estimates). At the same time, four of the 12 of the covering analysts raised their forecasts on TAP last week. During the past 30 days, two analysts raised their projections on BUD and four lowered their forecasts.
It is likely that the lower-cost beers have more price elasticity than the higher cost, specialty beers. Ironically, higher beer prices could potentially help BUD and TAP as some consumers opt for lower price brands (e.g. Michelob, Coors) over premium "microbrew" brands (e.g. Abita, Shiner Bock).
BUD, SAM and TAP are all Zacks #3 Rank ("hold") stocks and are classified in Beverages-Alcoholic.
One group that has lower exposure to rising commodity prices is Medical-Drugs.
In recent weeks, brokerage analysts have boosted their profit projections on several drugmakers in response to good third-quarter earnings. The Zacks Revision Ratio (total positive revisions divided by total negative revisions) stands at 1.25 for this group versus 1.13 for the entire Zacks Rank universe.
Normally, such bullishness reflects industry trends. In the case of drugmakers, however, company-specific developments are more likely to drive earnings estimates higher. Shire PLC (Nasdaq: SHPGY) and UTD Therapeutic (Nasdaq: UTHR) provide evidence of this.
SHGPY recently raised its target for full-year revenue growth to at least 30% from 25%. The company is gaining share among ADHD patients with its recently launched VYVANSE. Hunter syndrome treatment ELAPRASE and ulcer drug LIALDA are also capturing market share.
The revised guidance led the majority of covering brokerage analysts to up their forecasts for both 2007 and 2008. The consensus earnings estimate for this year now stands at $2.26 per share, up 16 cents from a month ago. The consensus earnings estimate for next year now stands at $2.98 per share, up 10 cents from a month ago.
Strong sales of blood pressure medication Remodulin allowed UTHR to generate third-quarter revenue growth of 46%. The strong growth also translated into higher profits. The company earned 66 cents per share, besting expectations for 33 cents.
The majority of covering brokerage analysts raised their profit forecasts for both 2007 (up 25 cents to $1.32 per share) and 2008 (up 33 cents to $2.28 per share).
SHGPY is a Zacks #2 Rank ("buy") stock and UTHR is a Zacks #1 Rank ("strong buy") stock. Medical-Drugs contains three other Zacks #1 stocks.
The interactive Zacks Industry Rank List allows you to see all of the companies, and their Zacks Rank, within more than 200 industries. See the list at http://at.zacks.com/?id=3208.
About Zacks Industry Rank and the Zacks Rank
Zacks Industry Rank is calculated by averaging the Zacks Rank for all covered companies within a given industry. The Zacks Rank is assigned to approximately 4400 stocks and ranges from #1 (“Strong Buy”) to #5 (“Strong Sell”). Both the Zacks Industry Rank and the Zacks Rank are quantitative indicators designed to cover periods of 1-3 months.
Since 1988, the Zacks Rank has proven that "Earnings estimate revisions are the most powerful force impacting stock prices." Since inception in 1988, #1 Rank stocks have generated an average annual return of +32%. During the 2000-2002 bear market, Zacks #1 Rank stocks gained +43.8%, while the S&P 500 tumbled -37.6%. Also note that the Zacks Rank system has just as many Strong Sell recommendations (Rank #5) as Strong Buy recommendations (Rank #1). Since 1988, Zacks Rank #5 stocks have underperformed the S&P 500 by 129% annually (+5 % vs. +12%). Thus, the Zacks Rank system allows investors to truly manage portfolio trading effectively.
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