Take a Shot, or 3, at Growth With These Companies

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

With rising demand and increasing per-capita disposable income, the global consumption of alcoholic drinks will bypass the $1 trillion mark. Volume will reach around 210 billion liters in 2014, an increase of 10% over the last five years, and flavored alcoholic beverages represent half of the overall market value. The companies in this industry are driving hard to deepen their foothold in the market. They are adopting various strategies to gain investors' confidence while delivering the best results.

I have analyzed three companies from the alcoholic beverage industry in this article. Let's find out how their distinct strategies will help them in attracting investors.

Expansion plan for future growth

Brown-Forman's (NYSE: BF-B) Woodford Reserve has reported the strong year-over-year growth of 28% with a record volume of production of around 250,000 nine liter cases in the fiscal year ended in April. This growth is attributed to the growing taste for its super premium bourbon whiskey globally, driving record exports of these spirits. To meet this growing global demand, the company plans to expand the Woodford Reserve Distillery in Versailles, Kentucky. It will invest around $35 million this fiscal year to expand its production line and build three new warehouses that will store more than 165,000 barrels of bourbon.

Additionally, the company signed an agreement with the Kentucky Economic Development Finance Authority, or KEDFA. Under this, the company will receive the tax incentive of nearly $2.5 million annually over the term of the agreement. It believes that there will be continuous consumer interest in bourbon and is aggressively focusing on TV advertisement. Despite capex, it will report year-over-year growth in operating income of around 7.2%, to $963 million, in fiscal year 2014.

With its strong performance in the U.S. and international market, the company's leading brand, Jack Daniel’s, helped Brown to generate revenue of $3.78 billion in the fiscal year ended in April. The Jack Daniel’s brand family includes Tennessee Whiskey and Tennessee Honey, which are major contributors to company growth. Honey delivered 37% revenue growth in the U.S. and contributed around 25% to the company's revenue for the year. Approximately half of this growth was driven by improved pricing and cost savings associated with value-added packaging.

To enhance its brand image and revenue growth, Brown-Forman launched its first TV advertisement campaign, which enhanced its revenue by 20% this year. The company expects to generate the revenue of $3.98 billion in fiscal year 2014.

Debt restructuring enhancing operating margin

In June, with the aim of improving its debt portfolio and enhancing its operating margin, Beam (NYSE: BEAM) offered $250 million of 1.75% senior notes due in 2018 and $250 million of 3.25% senior notes due in 2023. The company plans to use these funds to redeem higher coupon callable debt. Through this debt restructuring, it will improve its operating margin by around 5% to reach $604.6 million in this year.

The company has acquired Pinnacle, Skinnygirl, and high-end whiskey brands in past few years. Beam considers these brands as power brands; they are the main growth driver in North America, representing year-over-year revenue growth of 18%, to $364 million, in the first quarter.

Pinnacle revenue grew by 8%, whereas Skinnygirl reported growth of 140% with continuous product innovation and exploration in new markets. Growth from these brands was also partially driven by pipeline sales and the company’s entrance into the Mexican market. Additionally, the company enhanced its route-to-market strategy, which helps deepen its footprint in the Mexican market. This growth trend will continue for the remaining quarters of this year and revenue from North America will grow to $1.57 billion in 2013 from $1.45 billion last year, a year-over-year growth of 8%.

Increasing stake in emerging market companies

Diageo (NYSE: DEO) derives around 43% of revenue from emerging markets, which are generating fantastic growth opportunities for the company. Therefore, it recently acquired an additional stake of 14.98% for $521 million in United Spirits, an Indian-based whiskey distiller. Now Diageo holds nearly 25.02% stake in the company. With this acquisition, the company has transformed its position in the Indian market. Moreover, it expects significant growth opportunities in the emerging markets of Africa and Asia. The company’s overall revenue will rise by 7%, to $17.36 billion, with an EBIT margin of 30.3% this fiscal year.

With strong free cash flow, Diageo is continuously looking to enhance the investor’s growth. It increased the interim dividend by 9% in the first half of the fiscal year ended in December 2012. The company expects free cash flow of around $2.5 billion in fiscal year 2013 and $3.3 billion in fiscal year 2014 from almost $2.8 billion in 2012.

The free cash flow in fiscal year 2013 decreased due to the acquisition of United Spirits. However, the company is confident in its ability to generate higher cash flow in the future and return it to investors in the form of a dividend. The company is expected to declare a total dividend of $1.934 billion in fiscal year 2013 and almost $2.1 billion in the next fiscal year from $1.7 billion last year.

Conclusion

Brown-Forman’s expansion plan of Wood Reserve Distillery and promotional activity for Jack Daniel’s will drive future growth.

Beam's debt restructuring program and previous acquisitions allow the company to generate more growth opportunities.

Diageo’s acquisition of United Spirit will help in enhancing its footprint in India as well as help leverage the United Spirit brands to enhance itself. Its strong cash flow enables the company to maintain future dividend payouts.

I recommend a buy on all these stocks.

The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.


Shweta Dubey 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!

blog comments powered by Disqus