Beam’s Earnings Confirm – Liquor Industry Should Be in High Spirits

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

Beam Inc. (NYSE: BEAM), maker of Jim Beam whiskey, reported solid earnings last Friday.  The company is the successor of Fortune Brands after the spinoff of its home and security business.  Fortune Brands Home & Security (NYSE: FBHS) was spun off in September and I think this is a strong positive for Beam.  FBHS reported a fourth quarter loss last week even though sales were up across most categories.  The company posted a $68.4 million loss, including a $90 million write-down. While the spin-off is a solid company, the spirit company is already benefitting from not being tethered to the housing industry.

Beam, like its competitors, has spent a lot of money on developing and acquiring innovative brands.  Last year’s strongest addition was the Skinnygirl line of low calorie drinks, which helped target the female demographic and led to strong sales.  In January, Beam finished their $95 million acquisition of Cooley Distillery, the last independent Irish-whiskey distillery.  This is the company’s first move towards producing Irish whiskey, which is experiencing strong demand. Irish whiskey is very popular in Russia and Brazil, as well as the US, and demand is growing rapidly.

Beam reported a profit of $94.1 million or $0.59 a share up 10% from $85.4 million the previous year.  The company reported a 1.2% increase in net sales to $637.5 million and expects global spirit sales to rise 3% this year.  Sales growth for the quarter was strongest in the Asia Pacific/South America regions at 7% gain, followed by Europe/Middle East/Africa with 5% and North America bringing up the rear at 2%.

Competitor Brown-Forman (NYSE: BF-B) turned in solid results in December, benefiting from the trend toward spirits.  According to the Distilled Spirits Council of the United States, the volume of spirits sold in the US was up 2.7% in 2011 and continued to take market share from the beer industry.  Part of this growth has been attributed to continued innovation from the companies, including Brown-Forman’s Jack Daniels Tennessee Honey Whiskey and the aforementioned Skinnygirl line.  Brown-Forman experienced a strong increase in net sales, nearly 12% for the quarter, and indicated flavored whiskey as one of its growth drivers.

Diageo (NYSE: DEO), the London based firm responsible for Smirnoff Vodka, Johnnie Walker, and Captain Morgan rum, reports earnings on February 9th and is expected to continue the trend.  The company posted a rise in sales and volume in the previous quarter, citing emerging market demand as the cause.  Diageo showed an astounding 30% sales growth in Latin America and the Caribbean during that quarter. 

How do the three competitors compare?  Over the past year all 3 stocks have performed admirably, each returning more than 15% for the year. All three companies noted an uptick in demand from restaurants and bars, which points to continuing strength going forward.  I consider Diageo the best current value because it offers the strongest dividend yield as well as the strongest net profit margin. I expect strong earnings from Diageo on the 9th.  Given the domestic trend as well as the growth in emerging markets, I expect all three companies to perform well over the next year.

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p>PE</p> </td> <td> <p>Dividend Yield</p> </td> <td> <p>Net Profit Margin</p> </td> <td> <p>% Return Over Last Year</p> </td> </tr> <tr> <td> <p>Beam Inc.</p> </td> <td> <p>46.48</p> </td> <td> <p>1.51%</p> </td> <td> <p>6.01</p> </td> <td> <p>20.03%</p> </td> </tr> <tr> <td> <p>Brown-Forman Corp.</p> </td> <td> <p>20.80</p> </td> <td> <p>1.68%</p> </td> <td> <p>16.80</p> </td> <td> <p>24.01%</p> </td> </tr> <tr> <td> <p>Diageo plc.</p> </td> <td> <p>19.31</p> </td> <td> <p>2.79%</p> </td> <td> <p>20.30</p> </td> <td> <p>16.98%</p> </td> </tr> </tbody> </table>


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