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| Searching
for Bargains in the Alcoholic Beverage Industry |
Published: September 5, 2006
In the world of consumer goods,
we have all seen some products become immensely popular almost
overnight, and then fade into obscurity almost as quickly. Alcohol is
most definitely not one of those products.
According to a recent Gallup poll, 64% of those surveyed said that they
drink alcoholic beverages. That percentage has held steady for decades;
a similar survey conducted in 1939 showed an almost identical reading of
63%.
However, while the overall percentage of drinkers has remained level,
those that do imbibe are doing so more frequently these days. Of those
polled who drink, nearly 75% said they had consumed a drink within the
past week -- a sharp increase from the 54% who had done so in the 1996
survey. Furthermore, ten years ago the average drinker consumed just 2.8
alcoholic beverages per week. That figure has since risen to around 4.5
per week.
Beer remains on top as the nation's drink of choice. However, the wine
and spirits groups have closed the gap markedly in recent years, and
they now sit close behind. Around the country, many drinkers,
particularly the trend-conscious younger crowd, have been increasingly
ordering a glass of wine or a splashy cocktail over a bottle of beer.
While per-capita beer consumption has been flat over the past several
years, wineries and liquor distillers have seen an uptick in their
business.
Major Players in the Alcoholic Beverage Industry
| Company |
2005
Sales |
2005
Net Income |
August
31st Price |
Fair
Value |
Discount
(Prem) to FV |
%
Below 52-wk high |
| Brown
Forman (BF-B) |
$2.4B |
$0.3B |
$76.98 |
$61 |
(26%) |
7% |
| Constellation
Brands (STZ) |
$4.6B |
$0.3B |
$27.29 |
$31 |
12% |
6% |
| Diageo
(DEO) |
$16.8B |
$2.5B |
$71.50 |
$89 |
20% |
3% |
| Fortune
Brands (FO) |
$7.0B |
$0.6B |
$72.60 |
$83 |
13% |
19% |
|
Thanks to several waves of
global consolidation, the total number of breweries and distillers has
declined sharply over the past several decades. As a result, the pool of
potential investment candidates in this industry has narrowed somewhat.
Furthermore, several of the largest names are privately-held companies.
However, each of the four companies listed above is worthy of additional
consideration. Of these, we believe industry leader Diageo (DEO) has the
most to offer investors.
A Closer Look at Industry Leader Diageo
Diageo is the world's largest distributor of beer, wine, and spirits.
The company produces, packages, and distributes a wide range of premium
products in more than 180 markets around the world.
Many of the world's most popular brands fall under the Diageo umbrella,
including: Crown Royal, Guinness Stout, Johnny Walker, Smirnoff, Captain
Morgan, Jose Cuervo, and Tanqueray. Better still, industry insiders have
noted that many consumers are migrating to high-end premium brands --
playing right into Diageo's strength.
Along with a bright revenue picture, Diageo also enjoys powerful
economies of scale, intoxicating net profit margins of around 22%, and
very low capital requirements. Last year, the company's capital
expenditures ($549 million) only amounted to about 3% of total sales
($16.8 billion). As a result, DEO is able to generate barrels of free
cash flow -- much of which it uses to fund a $2.18 annual dividend
payment, which equates to a yield of about 3%.
Clearly, DEO is the "800-pound gorilla" of the alcoholic
beverage space, with revenues and profits that exceed those of the other
three firms on the above list combined. Not surprisingly, Diageo enjoys
considerable scale advantages over many of its peers. At the same time,
the firm's earnings outlook is among the brightest of the bunch. Yet
despite these positives, of the four stocks above, DEO is trading at the
steepest discount to its estimated fair value.
Last Call
The alcoholic beverage business is a mature industry. As such, there are
limited opportunities for strong top-line growth, particularly in
developed markets. Nevertheless, stepped-up marketing efforts
industry-wide continue to pay off, siphoning market share away from
leading brewers like Anheuser-Busch.
All things considered, the major producers of wine and spirits have many
reasons to smile. Chances are virtually nil that consumers around the
world will suddenly lose their thirst for alcoholic beverages, so demand
for their high-margin products is all but guaranteed. With this in mind,
conservative investors who are drawn to steady, predictable revenues and
cash flows might want to sample something from the alcoholic-beverage
group.
Note:
The above article was merely a small excerpt from
a recent issue of our premium value investing newsletter -- Half-Priced
Stocks. The mission of Half-Priced Stocks is to
help our readers identify securities that are trading at a steep
discount to their intrinsic net worth. In some cases this
discount can reach up to 50% or more, giving savvy value
investors the chance to purchase quality stocks for just pennies
on the dollar. To learn more about our Half-Priced Stocks
service, please visit the following link:
https://www.StreetAuthority.com/subscribe-hps.asp |
Thanks for reading!
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Nathan Slaughter
Editor
Half-Priced Stocks, The ETF Authority
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in-depth guidance on today's leading value opportunities, plus educational guidance, please subscribe to
Nathan Slaughter's premium value investing newsletter --
Half-Priced
Stocks |
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