Why This Stock is a Good Long Term Buy
Anjali is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Brewers and distillers are often considered as a safe set of stocks. Alcohol companies offer good stability as alcohol consumption is relatively immune to the overall economy. Consumers buy alcohol in good times to celebrate, and to wash out their sorrows in bad times. Let's examine the stock price movement of alcohol companies like Beam Inc (NYSE: BEAM), Diageo plc (NYSE: DEO) and Brown-Forman Corporation (NYSE: BF-B) over the last twelve months.
While Beam and Diageo have had a good run in the last twelve months, Brown-Forman has struggled over the last year and has seen a 7.36% correction. Investors may be tempted to buy Brown-Forman after such an underperformance. However, I don’t think investors should chase Brown-Forman despite the correction as the company is still trading at a premium to both Beam and Diageo. The following table summarizes the expected growth rate of these companies over the next five years.
Source: Yahoo finance
We can see that Diageo has the lowest expected growth rate among these companies (and thus has the lowest multiple). However, Beam has the best growth rate among these companies yet it is trading at a discount to Brown-Forman. Moreover, I think there is an upside to the consensus estimates as Beam has significant expansion opportunities and will benefit immensely from the rapidly growing spirit market.
Spirits Gaining Alcohol Share
Spirits and wine have been growing as a percentage of the total alcoholic-beverage market in the USA, at the expense of beer. Increased TV advertising, the new “cocktail culture” and effective innovation are some of the factors driving this growth. Over the last decade, spirits have been continuously gaining market share in the alcoholic beverage market. The spirit market has picked up a good pace over the last three years and has gained 3 points in the alcoholic beverage market over this period in addition to the 2 point gain in the seven year period prior to that (hence gaining a total of 5 points over the last decade). Looking at the rapidly growing spirits markets, Beam being the largest US-based spirits company, is going to benefit a great deal. Beam has a broad portfolio of brands across spirit categories, with particular strength in bourbon, which is outgrowing the spirits market in the United States.
In the last 5 years, Beam has been experiencing a continuous process of international expansion. Going forward, the company has a platform to expand internationally, via bourbon and brands such as Teacher’s (No.1 scotch in India, No.2 in Brazil). India is the world’s third largest spirits markets and although the Indian spirits market is dominated by local whiskeys (which are generally not grain-based), I see strong long-term growth in the region. Moreover, the company has recently entered high-growth categories through the acquisitions of Skinnygirl and Pinnacle Vodka.
Acquisition of Cooley Distillery
Beam which already owns impressive brands like Jim Beam Bourbon, Courvoisier Cognac and Laphroaig scotch Whiskey further expanded its portfolio by acquiring Cooley distillery last December. Cooley distillery is the industry’s only remaining independent Irish whiskey distillery. I think it is a big positive for the company as Cooley will increase Beam’s exposure in the rapidly growing brown spirits market and help the company attain an even better top-line growth profile.
Investing to insure continued outperformance
Following EPS beats of $0.06 and $0.04 so far this year, management is sensibly stepping up marketing and capex to support long-term sales and profit growth. In order to insure continued outperformance, Beam has announced that it will increase investment in the second half behind its most exciting brands and innovations, targeting a 50-100bp increase in brand marketing support as a percent of sales versus 15.8% in 2011. The company also has plans to increase investment behind its aged spirits in order to support demand for its bourbon, scotch, and cognac brands.
As a result of these investments and tough comparisons in the third quarter, EPS might moderate in the second half. However, these investments will drive long term sales and insures a continued outperformance in the long run.
Going forward into the fourth quarter and beyond, I expect the company to continue its strong earnings momentum given its exposure to spirits and favorable positions in key international markets. The Acquisition of Cooley distillery provides a further advantage. Demand for spirits remains robust and being the fourth largest Premium spirits company in the world and the largest US-based spirits company, Beam is set to see an accelerated growth. Thus, I recommend it as a good long term investment.
AnjaliPaliwal has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Beam and Diageo plc (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.