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Vodafone the Victor in Verizon Wireless Buyout

British telecom giant Vodafone (VOD) agreed to sell its stake in Verizon Wireless to Verizon Communications (VZ) in one of the biggest deals in history.  That’s the headline.  But the question no one seems to be asking is Why was Verizon that eager to spend $130 billion on a capital-intensive business in a saturated market with cutthroat competition from cheaper upstarts?

Seriously.  Mobile phone penetration is the United States was 102% as of the end of last year, and this is a conservative number using the entire population of the United States and its territories as the denominator.  Removing small children, the elderly and infirm and the prison population, the number would be significantly higher.  Not only does every American already have a cell phone, but many of us have two or three.

Sure, everyone already has a phone, but there is still growth in the smartphone market, right?

Not nearly as much as you might think.  Already, more than 61% of all American mobile phones are smartphones. Even among Americans aged 55 and older the rate of ownership is 42%.

Will the Baby Boomers adopt iPhones and Androids in larger numbers going forward?  Probably.  But the low-hanging fruit was picked a long time ago.  And to the extent that the over 55 demographic adopts smartphones, they are likely to buy entry-level data plans that are highly competitive on cost.

It’s hard to see a lot of room for margin expansion in a saturated market where the “stickiness” of consumer loyalty is being steadily eroded by falling switching costs to the consumer.  Add to this the body blow that T-Mobile (TMUS) dealt to the industry with its adoption of transparent pricing and the elimination of the carrier phone subsidy, and it’s hard to find much to like here.

Don’t underestimate the effect of that last point.  Carriers have offered “free” or highly discounted phones for a long time as a way of enticing you to pay up for a Cadillac voice and data plan.  It was a terrible deal for the consumer, but the pricing was opaque enough that most had no idea just how bad of a deal it was.  T-Mobile’s transparent pricing has been something of a wake-up call.

All of this is a long way of saying that Vodafone got the better end of this deal.  They rid themselves of a profitable but soon-to-be no-growth business, have the means to pay off all company debts nearly three times over, and have the financial firepower to expand their emerging markets presence, which is already one of the largest among Western carriers.

As far back as 2011, Vodafone’s CEO had publically stated that Vodafone was an “emerging markets company” and not a European company.  Emerging markets accounted for 29% of Vodafone’s service revenue last year and virtually all of its expected future growth.  The company operates in 30 countries and partners with other carriers in 40 more.

So, what will Vodafone do with all of its cash?  That’s a fine question, and the company hasn’t given a lot of specifics just yet.  Some combination of debt retirement, share repurchase, and a special dividend would seem likely.

Should you buy Vodafone now, after the Verizon Wireless divesture?  Perhaps. Vodafone likely will release a large special dividend, but it’s harder to say whether its current generous 6% dividend will stay intact. Also, Vodafone is a great way to get “back door” access to the emerging middle class in India and parts of Africa.

This article first appeared on InvestorPlace.

Charles Lewis Sizemore, CFA, is the editor of the Sizemore Investment Letter and the chief investment officer of investments firm Sizemore Capital Management. As of this writing, he had no position in any stock mentioned. Click here to learn about his top 5 global investing trends and get your copy of “The Top 5 Million Dollar Trends of 2013.”

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Sober Up: The American Beer Market is Flat

Constellation Brands (NYSE:$STZ) shot up 37% yesterday and Anheuser-Busch InBev (NYSE:$BUD) rose a not-too-shabby 5% on speculation that the U.S. Department of Justice might let AB Inbev acquire  Grupo Modelo (Pink:GPMCF) after a few small revisions to the deal were made.

The Department of Justice torpedoed the original deal last month on fears that it would give AB Inbev nearly half the U.S. market and the monopoly pricing power that would come with it.

This is a big deal for Constellation for the reasons I gave earlier this month: Whisky and Beer Still Better Long-Term Bets than Wine.

Getting access to Modelo’s highly-recognizable brands like Corona and Negro Modelo is good for Constellation’s long-term future.  But investors need to sober up: the U.S. beer market is flatter than a week-old keg of Budweiser.

American domestic beer sales rose slightly in 2012 after falling for three straight years.  And within the domestic beer space, the growth is in high-end microbrews.  The big beer brands you are used to seeing in Superbowl commercials—such as AB InBev’s Bud Light or Molson Coors’ (NYSE:$TAP) Coors Light—are having a hard time getting the attention of drinkers.

Part of this is due to a bad economy; young blue-collar men got hit worse than anyone in the Great Recession.  But a bigger issue—and one that won’t improve with a recovering economy—is changing demographics.  The Baby Boomers are well past the heavy drinking stage of life, and Generation Y (made up of current 20-somethings and early 30-somethings) tends to prefer flavored cocktails over beer.

Generation X—my generation—still likes a good beer.  But we’re a small lot and we prefer microbrews when we can get them.

Big Beer knows that the domestic market is dead, which is why AB InBev, SABMiller (Pink: SBMRY) and Heineken (Pink:HEINY) have gone on an emerging market buying spree over the past decade.

AB Inbev has the best brand portfolio in Latin America, but the best growth potential today is in Africa, where SABMiller and Heineken are the best-positioned.  This was my rationale for recommending Heineken in the Sizemore Investment Letter and why I continue to hold it today.  Heineken already gets more than a fifth of its profits from Africa, and SABMiller gets well over a third.  This will only rise as African living standards continue to improve.

So, if you buy beer stocks, make sure you’re buying for the right reasons.  The large mega brewers are long-term plays on the rise of the emerging market consumer.  Just don’t expect too much from the domestic American market.

And on that note, I’m off to crack open a Shiner Bock, which is, alas, not a publicly-traded company.

Disclosures: Sizemore Capital is long HEINY.

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Investing in Those Elusive Chinese Consumers

China’s slowdown looks to have bottomed out, at least for now. Third-quarter GDP grew by 7.4% , the lowest rate in three years, but in line with what economists were expecting.

But most encouraging was the news that Chinese retail sales saw growth that was nearly double that figure at 14.4%.

I’m not the biggest fan of China’s “managed capitalism,” and, eventually, I believe that this model will reach the end of its road. In one critical aspect, it already has. China’s leaders have stated it is their goal to make China’s economy more “balanced,” meaning less dependent on exports and investment and more focused on domestic consumer spending.

But whether Beijing desires it or not, I believe this transformation would be happening anyway. As China’s middle classes expand and adopt acquisitive Western lifestyles, it is inevitable that their economic clout will be felt.

Ah, the elusive Chinese consumer. Just hearing him mentioned is enough to trigger a Pavlovian dog response in investors. But getting real access to him has proved to be difficult.

Consider that familiar consumer staple we know and love: beer. I have been a consistent advocate of global “Big Beer” as a play on rising consumer incomes. Heineken (HINKYis a favored long-term holding of my Covestor Sizemore Investment Letter portfolio , and I have also written favorably about Anheuser-Busch InBev ($BUD). Both of these megabrewers have excellent exposure to the growing — and beer swilling — emerging market middle class.

But what about Chinese brewer Tsingtao Brewery (TSGTF)? It is, after all, the best pure play on Chinese beer consumption. Unfortunately, it is also too expensive to be taken seriously. Investors wanting access to Chinese beer drinkers have bid the shares up to 25 times earnings and to a dividend yield of less than 1% (as of 10/22).

Chinese Web browser Baidu ($BIDU) is also a bit on the pricey side at 29 times earnings, a valuation I might have expected to see 12 years ago. China Mobile ($CHL) remains attractively priced and pays a respectable 3.5% in dividend yield (as of 10/22).

Otherwise, it is a real struggle to find Chinese stocks with decent liquidity that cater to the country’s domestic consumers.

Instead, I continue to be a fan of the indirect approach, finding American and European companies with high exposure to China. Luxury goods stocks have been a good fit, and most have sold off, or at least traded sideways, in recent months due to fears that China’s slowdown would hit sales.

With China looking to be turning a corner, luxury firms will likely have a nice finish to 2012. One that I particularly like is the British Burberry (BURBY) . Burberry lost a quarter of its value last month on fears that its sales in China were slowing worse than expected. Shares have recovered about half of those losses in the weeks that followed, but expectations for the company are mixed.

Should Chinese luxury spending recover even slightly — and I expect that it will do much better than that — I expect Burberry to enjoy a nice multi-month rally.

This article first appeared on MarketWatch.

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Beer Stocks: The Keg Party is in Emerging Markets

Back in April, I wrote favorably about Molson Coors ($TAP) (see “Beer Stocks: Crack One Open”), noting that the brewer was significantly cheaper than Anheuser Busch InBev ($BUD) and SABMiller (SBMRY) and that it paid the best dividend of any major brewer.  At 3.1%, its dividend yield at the time was nearly double that of Anheuser Busch InBev.

Since then, Molson Coors is up a modest 10%, more or less in line with the S&P 500.  Meanwhile, BUD has rallied by more than 20%.

But looking longer term, we see an even starker contrast.  Since the beginning of 2010, Molson Coors has trailed its “Big Beer” peers by a wide margin.  Anheuser Busch InBev, SABMiller and Heineken (HINKY) are up 66%, 50%, and 30%, respectively.

But Molson Coors?

TAP has been flatter than a three-week-old keg, actually showing a slight loss over the past two years.

So, what gives?  What explains the lack of investor interest in Molson Coors?

It’s really quite simple.  Molson Coors missed the party in emerging markets.

Prior to its June acquisition of Eastern European brewery StarBev, Molson Coors had negligible exposure to emerging markets.  Its business was limited almost exclusively to North America and the UK, where beer brewing is a slow-growth business.  And outside of its trendy Blue Moon brand, Molson Coors had also largely missed out on the one promising growth outlet for the North American market: upscale premium microbrews.

The company found itself selling low-margin, mass-market beer to an aging and shrinking North American and British market.  Molson Coors faced relentless competition from both Budweiser and Miller at the mass-market level, and from innumerable up-and-coming foreign and premium brands at the higher end.  Not the sort of scenario that would make investors thirsty for more.

Even after the StarBev merger, Molson Coors will only sell about 14% of its volumes outside of North America and the UK.

Meanwhile, take a look at BUD.  Anheuser Busch InBev sells more beer in Latin America (34% of volumes) than it does in North America (32% of volumes).  Overall, emerging markets make up more than half of all beer sold.

And BUD isn’t even the best positioned of the group.  Heineken is a long-term recommendation of the Sizemore Investment Letter precisely because of its exposure to emerging markets and specifically to Africa, the next great growth market.  Heineken gets 21% of its profits from Africa already, and this figure is set to skyrocket as African incomes rise and millions of Africans join the ranks of the middle classes.  Rival SABMiller is also a major player in Africa, and particularly in South Africa.

Heineken also made a major expansion into Southeast Asia this year with its purchase of Asia Pacific Breweries.

So, where does all of this leave Molson Coors?

With the global beer market already well on its way to consolidation, there are not a lot of attractive acquisition targets left to snag, and those that do come up are not likely to go cheaply.  Realistically, Molson Coors will be primarily a North American seller of suds for the foreseeable future.

This isn’t all bad.   While the Echo Boomers—the large generation of Americans in their 20s and very early 30s—do not slosh the stuff as enthusiastically as previous generations (they tend to prefer vodka-based mixed drinks), there are signs of life in the domestic market.  U.S. beer shipments are actually up this year, after falling slightly for the past three years in a row.  Mass-market brewing may no longer be a growth business in the United States and Canada, but it is generally pretty stable.  We don’t have to worry about any of the major brewers facing financial distress any time soon.

Looking at Molson Coors’ financials, I continue to believe the stock has value as a cheap income stock.  TAP trades for just 11 times expected 2013 earnings and pays a dividend of 2.9 percent—the highest of all major beer brewers.  This isn’t a “home run” stock, but it’s one that is priced to offer decent returns going forward.

Bottom line: If you want growth, Heineken remains my favorite brewer.  But I consider Molson Coors a worthwhile choice for a long-term dividend-focused portfolio.

This article first appeared on InvestorPlace.  Sizemore Capital is long HINKY.

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