Alcohol May be Man’s Worst Enemy, But This Alcohol Company Looks Refreshing!

By Gayatri Sharma - September 21, 2012 | Tickers: BEAM, STZ, DEO | 0 Comments

• Email
• Print

Alcohol beverage companies like Constellation Brands (NYSE: STZ), Beam (NYSE: BEAM) and Diageo (NYSE: DEO) have had an impressive run over the last year and have significantly outperformed the broader markets. The following chart summarizes the stock price movement of these companies with respect to S&P500 over the last year.

Over the last year, Constellation Brands has been the biggest gainer with a gain of ~72%, followed by Diageo (~38%), while Beam’s 29% gain is the least among these companies. Let’s analyze the valuation multiple of these companies.

Beam is trading at the highest valuation among these companies. I think the premium valuation is justified as the spirit industry is growing rapidly and is expected to gain market share from beer and wine going forward, and thus, Beam’s strong positioning in the global spirits markets could unlock a significant growth opportunity in the future. Diageo is another spirits company which will benefit as spirits continue to gain market share.

However, I am particularly optimistic about Constellation Brands as the company is still trading at forward PE of ~12 despite its recent outperformance and offers a good upside potential. Constellation’s strong share performance was driven mainly by the company’s announcement to acquire the remaining stake in its U.S. beer joint venture Crown Imports. I think the investors have gained a better appreciation for the proposed terms of the Crown relationship with ABI, the durability of the contract and the more favorable financing terms. Beyond the value of the beer business, I think there is a favorable scenario for Constellation’s wine business as the industry manages through a tightening supply situation.

The wine category continues its secular trend of share gains within the beverage alcohol category, growing steadily at low-to-mid-single digits. Over the last few years, Constellation Brands should have benefitted from this trend as it is one of the largest wine companies in the world. On the contrary, the company was a consistent share donor over this period and as a result is trading at a significant discount to the staples sector. I think that is largely due to the Company’s prior acquisitive strategy. However, Constellation is now shifting its focus away from deals and towards a stronger, more concentrated wine operation.

Moreover, Nielsen data suggests that retail wine prices have started to move higher. While Gallo and The Wine group have led the way with prices up ~7%, Constellation’s pricing has lagged which has allowed it to accelerate volume share (which is up ~100 bps). Going forward, I think the company has a significant opportunity to take price increases and expect to see prices moving up later this year. The company now features an improving wine business which should see profitability inflect higher after FY13; a strong and steady cash flow generating beer biz with improved pricing power and limited COGS inflation; and a spirits business growing double-digits. I think the company is poised to more consistently deliver earnings growth, and therefore deserves a premium multiple as compared to its historical average. Thus, I believe Constellation Brands offers a good investment opportunity and recommend buying it.

• Email
• Print
• Feedback