SABMiller's (SAB) fiscal 2011 third-quarter trading update showed that emerging markets continued to drive growth in the quarter, as double-digit volume expansion there was mitigated by softness in Latin America and the United States. Both our thesis, which maintains that the company's scale results in a wide economic moat, and our 1,850 pence-per-share fair value estimate remain intact. We still think the stock is slightly overvalued.
On an internal basis, third-quarter volume increased 3% year over year, an acceleration from the 1% growth rate in the first half. Once again, performance varied considerably across segments. In Asia and Africa, volume grew 12%. We think both regions present attractive long-term opportunities for SABMiller, with large sections of these markets yet to trade up to branded beer. We think the firm is well positioned to benefit from favourable demographic and economic trends that should deliver considerable medium-term growth in the market for branded beer.
Latin America was weak, however, with volume down 1%. Although the performance in Latin America was very uneven across markets, this is in line with similar road bumps reported by other Latin American consumer products firms such as Coca-Cola FEMSA (KOF) in recent months. In the United States, despite strength in Blue Moon and to a lesser extent in other premium brands, volume fell more than 2%. In the US, SABMiller operates MillerCoors, a joint venture with Molson Coors (TAP), and although volume remained weak in the third quarter, we think the joint venture can continue to lower operating costs as it makes its distribution network more efficient and slashes duplicate back-office costs.
In the second half of the year, we expect premiumisation and per capita consumption growth in emerging markets to drive growth, but increasing volume and raising prices will be difficult in mature markets. With the stock trading at 18 times our estimate of fiscal 2011 earnings, we think the market is overlooking the prolonged impact that high unemployment, austerity measures, and rising gas prices will have on mature markets, as well as the structural decline of mass-produced brands in the US. At less than 11 times forward earnings, SABMiller's joint venture partner Molson Coors is more attractively valued, in our opinion.
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