The Best Beverage for Your Portfolio

Piyush 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) which is a premium alcoholic beverages company, acquired Pinnacle Vodka for $600 million earlier this year. Beam has a market cap in excess of $9 billion, and has its presence in North American, European and Asian countries. Diageo Plc. (NYSE: DEO) also acquired India based United Spirits for $2.1 billion. Diageo, which has a market cap in excess of $78 billion, has its presence in more than 180 markets around the globe.

What’s common here?

Both the companies are geographically diversified which manufacture and market alcoholic beverages, and have a long product line-up. Both companies chose to acquire a smaller company, instead of rolling out other products. If history would repeat itself, comparatively smaller wineries and distilleries could be potential acquisition targets, and here are 2 companies which I believe could prove to be great investments options.

Molson Coors (NYSE: TAP) is one of the largest brewing companies in the world and has a market capitalization in excess of $7.5 billion. The company provides over 100 beer brands in more than 50 countries.

Molson Coors acquired Europe based Starbev for $3.55 billion earlier this year. Starbev had generated revenues of $1 billion in the fiscal year 2011, and on the back of this acquisition, Molson Coors was able to report stellar financial results.

Quarterly EPS rose to $1.37, from $1.14 which beat the Street’s estimated $1.34. Quarterly revenues stood at $1.195 billion, which rose by 7%. Global beer volume was up by 30.8% and net sales were up by 25.3%. Operating cash flows increased from $603.4 million to $804 million and the company ended the quarter with a net debt of $4.1 billion. Overall the market was impressed by the results.

Molson Coors also has a long history of sustained dividend pay-outs, dating back to the early 1990’s. The shares of Molson Coors currently yield a decent 3.07% with a payout ratio of a modest 36%. The LT Debt/Equity stands at 42% and P/FCF equates to an impressive 12.2x. Going by the numbers, I don’t think Molson Coors would be having any debt related worries.

The shares of Molson Coors trade at a forward P/E of 10.49x and P/B of 0.92x, which indicate that the stock is still undervalued.

Constellation Brands (NYSE: STZ) however reported weaker results, with a merely 1% rise in revenues and an 8% decline in earnings. Over the current year, the company expects free cash flows to be between $450-$500 million, and EPS around $2-$2.1 per share.

The shares of Constellation Brands have risen by over 70% since it’s announced the acquisition of Crown Imports. Constellation Brands purchased a 50% stake in the latter for $1.85 billion. Crown Imports generated annual revenues of $2.47 billion in 2012. The companies expect to execute the deal in early 2013, following which the financial benefits of the acquisition can be seen immediately.

Shares of Constellation Brands trade at forward  P/E of 12.95x indicating that the stock is undervalued. With impressive P/FCF of 11.47x and Current Ratio of 3.32x, Constellation Brands won’t be having any debt repayment issues and would comfortably be able to meet up with unplanned expenses.

In my opinion, both the stocks have positive triggers with good financials. The possibility of their acquisition is always open, as these are well established companies with geographically diversified operations. Their shares appear to be undervalued and being in the consumer goods segment, their topline is relatively stable. In my opinion, investors should look to initiate long positions in these stocks due to all the mentioned reasons.


PiyushArora has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Beam, Diageo plc (ADR), and Molson Coors Brewing Company. 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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