Investing in Happy Hour

By Brian Shaw - July 24, 2012 | Tickers: BEAM, BF-B, STZ, DEO, TSRYY.PK | 0 Comments

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There’s a lot of money to be made in companies that specialize in the production and distribution of alcoholic beverages.  While single digit organic revenue growth may not be exciting, the combination of industry consolidation, solid free cash flow and an industry where demand is often insulated from economic pressure (more than other consumer discretionary sectors) creates a unique value proposition.   Like non-alcoholic beverage counterparts such as Coca-Cola, the best of the wine and spirits specialists provide a stable, recession-resistant addition to any portfolio while providing solid dividends and often market beating returns. 

Meet the Contenders

With the objective of finding best in class companies, let’s take a look at some contenders in the wine and spirits business.  First on the list is Diageo PLC (NYSE: DEO), with its impressive list of brands that include a multitude of widely recognized labels, including Johnnie Walker, Crown Royal, Baileys, Ketel One, Tanqueray and Captain Morgan.  Next, we’ll take a look at Beam (NYSE: BEAM), which split away from Fortune Brands last fall and features brands including Courvoisier, Maker’s Mark and of course Jim Beam.  Constellation Brands (NYSE: STZ) focuses more on wine (and more recently beer), with popular brands including Robert Mondavi, Clos Du Bois, Ravenswood and Ruffino.  Brown-Forman (NYSE: BF-B)’s flagship brands include Jack Daniel’s, Southern Comfort, Finlandia and Korbel.  And finally, a company that doesn’t receive much publicity in the United States: Treasury Wine Estates (NASDAQOTH: TSRYY.PK).  Treasury Wine Estates is a recent spin-off from Foster’s Group and features a wide-ranging list of winery brands including Penfolds, Beringer, Chateau St. Jean and Greg Norman Estates. 

All five of these contenders have outperformed the S&P by a wide margin thus far in 2012.  Now, let’s take a look at some key statistics for each to provide a more informed comparison of the companies. 

Diageo is the largest, most diversified company on this list.  In addition to a tremendous portfolio of widely recognized brands, the company bears a lot of similarity to Coca-Cola in its size, global presence, consistently strong dividend and dependable history of beating the S&P 500 over the last 1 year, 2 year, 5 year, 10 year and 15 year periods. However, as you’ll see in the chart above, the recent run up in share price to an all time high reached on July 20^th has stretched the stock’s valuation.  This steady increase in share price is supported by anticipated strong growth; analysts expect 2013 earnings of $6.45 per share, which translates into a forward P/E of just 16.36. 

Beam is a standout in the table above, with the lowest P/E ratio (10.78) and highest free cash flow yield (10.46%).  Both are attractive multiples, however it is important to dig further into the data; a quick look at the financials show that both the TTM P/E and FCF yields are distorted by Fortune Brands’ split into two companies last fall.  Looking ahead, Beam’s forward P/E based on analysts’ expectations for 2013 registers at a much more comparable 23.44.

Constellation Brands continues to grow through acquisition, including its $160 million acquisition of the Mark West winery brand last week.   Less than a month ago, Constellation also acquired Groupo Modelo’s 50% interest in Crown Imports for $1.85 billion in a bold investment in U.S. beer distribution.

Brown-Forman, like Diageo, has proven its success consistently over time with outperformance of the S&P over the past 25 years.  Amazingly, shares of Brown-Forman have increased in value over 3,500% since 1985.  In addition, Brown-Forman has earned a place on the prestigious list of 41 “dividend aristocrats” that have increased their dividend payouts for at least 25 years.

An almost polar opposite to Brown-Forman’s history of providing steady returns, Treasury Wine Estates is just starting to get the hang of operating as a separate company since its spin-off from Foster’s Group.  The stock remains volatile and has traded as low as $2.80 per share in its brief 15-month history.  Based in Australia, Treasury Wine Estates doesn’t get a lot of attention in the U.S. and is only traded lightly on the OTC markets.  However, restructuring and efficiency efforts have the company positioned to leverage its fantastic diversified portfolio of well-recognized winery brands.

Which is Right for You?

While all five companies have performed impressively thus far in 2012, picking which may belong in your portfolio depends greatly on your overall strategy.   For those looking for stability or income, Diageo and Brown-Forman are excellent choices.  For someone looking for a little more risk (and hopefully a lot more return), Treasury Wine Estates might make a compelling investment choice.

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