Liquor Before Beer, Portfolio in the Clear?

By Daniel Miller - August 8, 2012 | Tickers: BUD, BEAM, SAM, DEO, SBMRY.PK | 0 Comments

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My traditional way of ending business trips is with a double whiskey, tall glass and only a splash of coke. It’s as close as I get to my college era these days, gladly.  I decided even my portfolio could use a sip of alcohol. The epic question is, Beer before Liquor? The Dow hit 13,000 last week, yet most of us still have warranted uncertainty regarding the global and US economies. Alcohol Beverage stocks tend to be very resilient during economic slowdowns. Let’s breakdown beer and liquor/spirit producers and conclude which would be a good portfolio addition. In famous words from Bud, Here We Go! (Cue rescue dog).

Anheuser-Busch InBev (NYSE: BUD) and SABMiller (NASDAQOTH: SBMRY.PK) are beer selling goliaths, each with the same strategy. They sell inexpensive beer and make up for it in large volume of sales. This sales strategy has been executed flawlessly. The marketer in me points out that the re-positioning of Miller brands still needs some work. The innovation is, well, not so impressive. Sorry if that offends anyone who rushed out there to get the vortex bottle. While the innovation leaves some to be desired, MillerCoors is a completely solid company. Take a look at this table that highlights 4 key factors I use.

Anheuser-Busch is the largest beer company in the United States and has dominated for decades. That being said, MillerCoors sports a lower P/E Ratio with a better dividend. Combine that with slightly better % Return on Revenue and less % long Term Debt of Capitalization, and Miller sweeps Anheuser-Busch in those factors. MillerCoors is gaining ground and for the first time in two decades, Anheuser-Busch doesn’t own the top 2 selling beers due to Coors sneaking in for the #2 spot. In the first quarter MillerCoors showed an increase of 23% net income on 12% higher revenue. Both of these companies make solid choices for cautious investors anticipating a global slowdown. MillerCoors seems to have more room to grow and capturing market share even as I type this.

Boston Beer Co. (NYSE: SAM) is the largest craft brewer and the sixth largest brewer overall in the U.S. They hold a 20.2% share of the craft market in 2011 and trail only Heineken and Corona in premium beers.  Gross margins have mostly held above 50% but dropped slightly in the recent earnings. In a stock market with investors intensely focused on instant gratification and the most recent earnings report, it’s refreshing to see management with a long term vision. It’s especially refreshing when they put their money where their mouth is. Boston Beer has put time into building seasonal beers and new flavors. They’ve added 30 sales positions and increased promotional advertising by $6.5 million (9%) this year so far! They’ve also put the consumer first with their fresh beer program, ensuring their beers are representing Samuel Adams brand with the best taste. These are the intangibles you love to have with companies in your portfolio. This effort has cut into their near term profits, and was noted in their earnings call. I’m cool with it, you should be too.

Beam (NYSE: BEAM) is the second largest spirits company in the US and fourth largest in the world. Their business strategy is to focus on the premium brands including Maker’s Mark, Sauza tequila (ok, not so premium), Courvoisier, Canadian Club, Teacher’s scotch and of course Jim Beam. These brands have staying power and exposure to emerging markets. It’s a bit harder to decipher Beams balance sheet Year-over-Year due to their split from Fortune Brands. That means the P/E ratio which looks fantastic right now, will even out with the competitors. Beam beat expectations on revenue and EPS, with a net sales increase of 4% led by Jim Beam and Maker's Mark. To investors’ delight, management even raised guidance for the rest of the year.

Diageo PLC (NYSE: DEO), Has a jaw dropping list of premium brands that include Johnnie Walker, Crown Royal, Baileys, Ketel One, Tanqueray and Captain Morgan.  Diageo has a very similar strategy to Beam, both focusing on premium brands. My company uses the premium commercialization strategy as well. It’s easy to sell to stores/distributors because, in theory, everybody wins. The buyer is able to sell product at a higher dollar value, while taking more of each dollar to the bank with high margins. This drives high ticket rings and efficiency. What I really like about Diageo is they have about 40% of net revenue from emerging markets. They’ve also recorded a Return on Equity of 44%. I consider sustaining over 20% above average.

The right choice for your portfolio depends on willingness to accept risk. All of these companies are solid, but for me it’s liquor before beer. Here are the trends that led me to my decision. It’s clear that there are more liquor and wine consumers than there were a generation ago. Looking at the graphs above, from a poll on www.Gallup.com, you can see the clear trend of beer in decline and wine/spirits increasing. More telling for the future, in my opinion, is the graph showing the younger age section switching towards liquor faster than their parents’ generation. One reason for the trend is the recent ruling to loosen advertising restrictions on liquor. Companies have responded an increase in advertising spending. The campaign has hit its mark and will only further increase the market share liquor and spirits take from beer. The liquor companies are keying on fun for younger consumers using new flavors and innovative brands. Beer has been king for centuries. The trend is changing though, and faster than you think.

Conclusion
I like the Diageo brands and marketing campaigns (I got some captain in me). Best of all I like their price and growth potential. That’s my pick to diversify a portfolio with a company that has more potential growth and is resilient to a global slowdown. That being said, these 5 companies were mentioned for a reason. You really can’t go wrong with any of them!
Cheers!

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