If You Want to Make the Most Money, Buy the Best Liquor

Ken is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

After a difficult day or to celebrate success, when you’re a little bit down or even feeling your best, when the economy’s booming or bad times are looming, there’s one kind of product we’re sure to be consuming: alcohol! Can anyone think of any other substance consumed on such a widespread basis for such a wide variety of situations as alcohol? Can anyone think of a better way to find profits than within such a category? The real beauty of the alcohol industry is that it tends to grow when times are good, when times are bad, and even when times are just plain boring.

An industry with more brands than businesses

When the average person walks through a store specializing in the sale of alcoholic beverages, it probably never occurs to them that a very large portion of the brands on display are produced by a relatively small handful of businesses. The beauty of this situation for investors is that it makes it easier to isolate the best investment opportunities within such a massive market by comparing only a few businesses.

Considering the structure and nature of the industry and its customers, a good starting point for identifying potential investments is to simply go to the local beverage store and ask the manager to list his top selling brands for you, or simply sit down and write out a list of the brands that come to your mind and then go online and find the companies that own those brands.

I went through this exercise and came up with only three businesses that were responsible for producing all of the brand names on the rather long list I wrote down: Beam (NYSE: BEAM), Brown-Forman (NYSE: BF-B) and Diageo (NYSE: DEO).

Valuation separates the good from the better

Beam offers its namesake brand of bourbon, Jim Beam, along with a long list of other well-known brands. The company’s history dates back over 200 years to 1795 when Jacob Beam sold his first barrel of whiskey in Kentucky and laid the first brick in the foundation of the $10.4 billion business it is today.

Even with its storied and successful history, investing is still about buying assets below fair market value. In the case of Beam, based upon consensus analysts’ earnings estimates for 2013 and 2014, the business is trading at P/E multiples of 24.67 and 22.29, respectively, with a five year projected earnings growth rate of 10.9% per year. With a price to cash flow multiple of 20.1, this appears to be a very good business that is currently valued at a very high price.

Brown-Forman’s flagship brand is Jack Daniels, but it has an extensive portfolio of brand names, including Canadian Mist and Southern Comfort, that are recognized by consumers around the world. If for no other reason, the Jack Daniels brand and the customer loyalty it enjoys make this business worth a serious look and create enormous value in the company. While the price to earnings growth multiple sits at 26, based upon the consensus 2014 earnings and a five year projected growth rate of 12.2%, the company has achieved superb returns on equity, assets and capital over the past five years, averaging 25.8%, 13.8% and 17.8% respectively, proving that management knows how to operate the business in a very efficient manner. Considering the iconic brands held by this company, the strong valuation is, in all likelihood, justified; but, at around 24 times cash flow, it is not an inexpensive stock

Can the best really be the least expensive too?

Johnny Walker is the number one selling brand of scotch in the world, according to Top 5 of Anything, and sells more than 2.5 times as many cases as its closest competitor. But when it comes to top global brands, Johnny Walker fits right in with the rest of Diageo’s brands. It is nothing short of astonishing that one company has assembled this magnificent assortment of names under one parent.

Not only has Diageo assembled a stellar brand portfolio, it provides investors with the lowest PEG ratio of the three at 1.7, based on 2014 consensus earnings projections and the five year projected growth rate of 10.3%. But just because the company looks good in these areas doesn’t mean it can’t look even better. The stock currently pays a solid 2.34% dividend yield that only requires a payout ratio of 44% to cover, which makes it appear to be very sustainable. This business is also run by a management team that knows how to produce bottom line results with the spectacular brands they have assembled. Returns on equity, assets and capital have averaged 41.6%, 10% and 13.9%, respectively, over the last five years, a stellar record of performance.

A final toast to successful investing

While all three of these businesses have built strong brand portfolios and appear to be well-run, solid businesses, Diageo stands out as a potential investment opportunity given its current comparative valuation and unmatched portfolio of top brands across so many market segments. It is almost difficult to believe that the strongest portfolio of brands is also the most inexpensively priced stock.

Investors who buy Diageo today will be able to toast their success with a bottle of Korbel champagne from Brown-Forman or a nice Courvoisier cognac from Beam by using just a small portion of the profits they will enjoy for years into the future.


Ken McGaha has no position in any stocks mentioned. The Motley Fool recommends 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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