A Growing Name in the Drinks Business
10/01/2012 11:15 am EST
In recent years it has become more well known as the bourbon in a lot of bars, but there's a lot of underlying quality and upside in this well diversified global spirits company, notes Gavin Graham of Internet Wealth Builder.
The global wine and spirits sector benefits both from the maturing tastes of the aging baby boomers and the growing middle class in emerging markets. Therefore, I am recommending Beam (BEAM), the second-largest spirits company in the US and the market leader in the fast-growing bourbon segment.
Beam has been making the eponymous bourbon whiskey Jim Beam since 1795. But that's only part of the business. It also owns Maker's Mark, Teacher's, and Laphroaig, Canadian Club, Cruzan, and Courvoisier, and the fast-growing line of Skinnygirl flavored cocktails targeted at women.
In January, Beam purchased Cooley Distillery, maker of the Kilbeggan and Connemara brands and the last remaining independent Irish whiskey maker, for $95 million. It then bought Pinnacle Vodka, the fourth-biggest imported vodka brand in the US, filling the last major gap in its range of spirits.
Beam is one of two successor companies to one of the original conglomerates, Fortune Brands, an unwieldy collection of businesses. Having traded at a discount to the value its parts for many years, management—with some urging from activist shareholders—finally broke up the company last year into Beam and Fortune Brands Home & Security (FBHS).
The Cooley and Pinnacle acquisitions demonstrate that the Beam management team is focused on growing the business. Freed from the conglomerate shell, it is able to use its strong balance sheet to make accretive purchases.
The real attraction for investors, though, is Beam's rising exposure to the fast-growing overseas markets, where iconic Western spirits brands are seen as attractive ways to demonstrate rising living standards and style by the emerging middle class.
All in all, Beam's prospects for the next few years look attractive. Its sales on a comparable basis in the first half of 2012 grew 6%, against 3% to 4% for the market as a whole. The US bourbon market grew 11% in the second quarter of 2012, after 9% growth in the equivalent quarter of 2011.
The stock even pays a reasonable dividend of 82 cents per year after an 8% increase in January. That equates to a 1.4% yield. With the board having set a payout ratio of 35% to 40% of earnings, future dividend increases appear likely.
Investors looking for a relatively defensive investment with decent growth in revenues and earnings over the next few years and growing exposure to emerging markets should buy Beam.
There are rumors that a major beverage alcohol company such as Diageo (DEO), which lacks exposure to bourbon, may be willing to acquire Beam. But even without such an event to crystallize value, Beam should prove a profitable investment.