Why Heineken Sank Today

Key Points

• The beer maker reported its second-quarter and first-half earnings today.

• While organic revenue was up, volumes continued to decline.

• Heineken is dealing with lower alcohol consumption among the younger generation.

• 10 stocks we like better than Heineken ›

Shares of premium beer maker Heineken (OTC: HEINY) fell on Monday, down 9% as of 1:32 p.m. ET.

Heineken reported second-quarter earnings this morning. On a net organic adjusted basis, revenue and profits improved. However, growth came from price increases, as volumes continued to decline. As such, the continued volumes disappointment caused a sell-off following a recent rally in the stock.

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A noisy quarter wasn't so bad, but still disappointed

On an IFS basis, in the first half, Heineken saw revenue decline 5% and operating profit decline 7.1%, but these headline figures were skewed by divestitures, as well as a negative currency impact, as the euro has strengthened. On a "BEIA" basis, adjusting for divestitures and currency, net revenue was up 2.1%, and operating income was up 7.4%.

Those numbers don't look so bad; however, the stock fell anyway, as it became apparent that pricing actions drove the growth, while volumes sold continued to decline. In the second quarter, beer volumes declined 0.4% year over year. While improved from the first quarter, it was still a year-over-year decrease, and apparently lower than analysts had hoped. Perhaps the composition of the growth also worried investors, as volumes actually grew in most geographies but declined 4.8% in Europe, the company's largest market, which makes up 34.8% of total volume.

Image source: Getty Images.

Heineken is performing admirably in a hostile industry

The problem doesn't seem to be related to Heineken's execution or performance. Rather, the entire alcoholic spirits market appears to be growth-challenged. A Time magazine report from earlier this year noted that millennials and Generation Z are not consuming as much alcohol as older generations did. The share of adults under 35 who say they "ever" drink has declined from 72% to 62% over 20 years, according to a new Gallup poll.

Therefore, one should view any alcohol company as being growth-challenged for the foreseeable future. That doesn't mean there can't be successful investments in the space due to company-specific strategies, but investors should understand it may be a tougher road for outperformance.

After today's decline, Heineken does trade cheaply, at 14.5 times this year's earnings estimates with a 2.3% dividend yield.

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Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.