BEAM is Still a Great Stock
Justin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Beam (NYSE: BEAM) reported 4Q results that were slightly ahead of expectations. The new stand-alone company has performed pretty well since I highlighted it back in December. (Here) The stock has produced a total return of about 8.5% versus 9.8% for the S&P 500. Not too shabby for a low-risk stock during a blowout time for markets that saw the S&P 500 record its best January in 15 years! I am upping my December 2013 target price from $70 to $82 to factor in a much higher EBITDA level. Investors should continue to accumulate shares in this quality company based on consistent growth and the high probability of it being acquired by a larger rival.
Beam is the fourth largest spirits company in the world and the bourbon leader with annual sales around $2.5 billion. The company has a diversified portfolio of key brands including Jim Beam, Maker’s Mark, Canadian Club, Sauza Tequila, EFFEN Vodka, and Skinnygirl. They generate 33% of total sales from Jim Beam, which is significant, but not overwhelming. Bourbon is one of the fastest growing spirit segments thanks to continued premiumization and strong Asian sales.
The company reported 4Q11 EPS of $0.69 versus consensus at $0.67, a 9.5% gain for the year. Sales were ok, but not great, at +4% with operating margins providing the remainder of the advance. The thesis remains strong, however, with the core brands showing strong growth, especially in Asia. Management laid out 2012 EPS guidance at a high single-digit rate.
The company reported 2011 adjusted EBITDA of $678 million. A conservative estimate is 5% EBITDA growth in each of the next two years. The end result is forecasted FY13 EBITDA of $747 million. Using the previously justified acquisition multiple of 20x EV/EBITDA results in a takeout target stock price of $82 per shares. Discounting from year-end 2013 to today by the company’s weighted average cost of capital yields a current target price of $67, more than 23% above the today’s stock price.
The stock trades at 15x EV/EBITDA, one of the highest ratios in the industry. It is pricing in to some extent a possible takeover in the coming years. I clearly think this in the early innings; however, and that there is upside to 20x EV/EBITDA. What is the downside? That is tough to say, but we can look at companies that clearly have to no takeover premium built into their stock and see where they trade.
Diageo (NYSE: DEO) is the world’s largest spirits maker with brands such as Johnnie Walker, Smirnoff, Bailey’s, Guinness, Captain Morgan, and many more. They have built their scale by acquiring companies and their current size makes them the acquirer versus the target. The company pays an above average dividend and has top-notch diversity, but investors have no expectation of the stock being purchased one morning at a substantial premium to the current price. That stock trades at 13.6x EV/EBITDA, not that far below Beam’s, while having very limited multiple expansion upside.
Other alcohol peers such as Pernod-Ricard, SABMiller, and Brown-Forman all trade above 13x EV/EBITDA. It is reasonable to conclude that in the unlikely situation that Beam completely removes itself from any merger talk that shares could trade down to this level. From a multiple standpoint only, Beam has more than twice as much upside as downside.
Beam is a great stock for investors and offers a very attractive risk/reward. It should continue to bleed up over the next two years in anticipation of it being acquired. Even if that fails to materialize there will always be that anticipation built into the stock, unless of course management flat out rejects the idea. That seems unlikely because they know what that would do to the stock price. Investors shouldn't be biased by the recent strong performance of the stock- it can still be fetched at a happy hour price.
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