BEAM: Sinful Stock to Add to Your Portfolio

By Ashish Sharma - July 10, 2012 | Tickers: BEAM, BF-B, DEO | 0 Comments

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Beam Inc. (NYSE: BEAM) has significantly outperformed the broader markets over the last year. In the past 12 months, the S&P 500 has gained ~11% while Beam Inc. has jumped ~36%. We believe this outperformance is likely to continue going forward as this ‘sinful’ American spirits company has added some impressive brands in the recent past, which are likely to drive its growth going forward. The following are my key arguments for buying this company.

Impressive Acquisitions

Last December, the company expanded its portfolio by acquiring Cooley distillery, the industry’s only remaining independent Irish whiskey distillery for $95 million. Brown spirits are growing at a faster pace than the broader spirits market, and Cooley's acquisition is likely to help Beam outperform its peers in terms of growth. In addition, the company recently completed the purchase of Pinnacle Vodka and Calico Jack Rum from White Rum. Pinnacle is likely to add scale to the company and, although these acquisitions will likely be earnings neutral this year, they will be EPS accretive from next year onwards.

Strong Earnings Momentum

Beam has posted impressive results in the recent past with a top line growth of 8% in FY11, a 13% increase in profits in FY11, and a terrific 29% y/y increase in adjusted EPS in 1Q12. Income from continuing operations was $78.4 million (or $0.49 per diluted share) compared to $61.7 million (or $0.39 per share) for the first quarter of 2012, showing about a 25% increase. Excluding charges and gains, diluted EPS from continuing operations was $0.53, up 29% from $0.41 in the year-ago quarter. Net sales were up 13% on a comparable basis, which adjusts for foreign exchange, acquisitions, and the impact of the Australian spirits distribution agreement announced in the first quarter of 2011. This strong earnings momentum is likely to continue with the company’s exposure to brown spirits and favorable positions in key international markets.

Fast Growing Spirit Market

Since 2001, spirits have gained five points of value share in the alcoholic beverages market, including three points over the past three years. They are expected to gain market share from beer and wine in the coming years as well. Beam remains in the sweet spot of the attractive global alcohol beverage market, as total alcohol consumption continues to grow worldwide at a sizable clip (~3% globally with solid growth in the US and Germany, and double-digit growth in emerging markets) and spirits continue to gain significant market share, with bourbon, vodka and Irish whiskey among the faster growing in the US. Beam is also making inroads into the large and fast-growing US vodka space (~33% of the US spirits market by volume), where it currently has very low penetration (~4% value share). We believe Beam’s marketing and distribution efforts could unlock a significant growth opportunity in the sizable vodka category.

Valuations

Source: Yahoo Finance

Beam is currently trading at a forward PE of 23.94x, at premium of 7% to Brown Forman (NYSE: BF-B) and 49% to Diageo (NYSE: DEO). I believe that this premium is justified given its accelerating growth, exposure to brown spirits, and favorable positions in key international markets. Beam continues to follow its inorganic growth strategy as is evident from its recent acquisitions of Pinnacle Vodka and Calico Jack Rum. I believe this strategy, along with increasing contributions from its past acquisitions and strong organic growth, will help Beam continue its outperformance going forward.

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