17 July, 2007

Life Certainties: Death, Taxes and Alcohol

When times are good and when times are bad, it's a fact of life that people will drink either way.
Probably one of the most sustainable business models on the planet is making various alcohols. So for those interested in the long term investment opportunities, where would you start looking?

Well in your own liquor cabinet of course! Any bottles of Johnnie Walker scotch lying around? Maybe some Smirnoff vodka? Perhaps some Cuervo tequila is more your style? Oh you're a beer drinker is that it? Ever had a Guinness?
What do all those brands have in common, well they are all owned and distributed by Diageo (DEO).

This is a company that has had a very good 8 months with the stock moving from a 52 week low of $65/share to a high of $87. With the stock sitting at $85, is it still worth looking at? I say yes.
Sales growth is increasing worldwide, but most notably in North America, where trends of late are showing spirits are making their way into more homes while traditional beer drinkers are turning away. Maybe it's the whole carbs craze, but either way, the numbers don't lie.
Diageo sits with a P/E of about 18 right now, and pays almost 2.5% in dividends, which is very reasonable for this type of company.

Yes, Diageo is the biggest player in terms of market cap in the alcohol space, but it is growing and relatively cheap compared to it's main competitors, which include the likes of:
Brown-Forman (BF.B), which owns Jack Daniels, Finlandia vodka and Southern Comfort.
Constellation Brands (STZ), which controls Constellation wines and spirits and Crown products.
As well as the beer kings Molson Coors Brewing (TAP) and Anheuser-Busch (BUD).

The age old adage of "invest in what you know and buy yourself" certainly applies to these investments, so it's a matter of opening up the good cupboard, taking out your fine bottle of scotch and going from there. If it happens to be a Johnnie Walker, then by all means get on the Diageo train.

Disclosure: Author holds no positions in the above mentioned companies


Chris Krasowski said...

I was asked about more speculative alcohol plays when this article appeared on SeekingAlpha.com. So I thought I'd break down one potential play in this space that has a market cap of $1.5Billion as opposed to Diageo's $57Billion. The company is Central European Distribution (CEDC) and what they do is distribution of, you guessed it, alcohol into and throughout Central Europe. They also produce and sell vodka throughout Poland and distribute an overwhelming number of other brands through the region. The company has had a run-up in its shares over the last year from a low of $18/share to a high of $41. Shares are about $39 right now but even though part of the boat may have been missed it still deserves a look with a forward P/E of 19 and a Price to Earnings Growth ratio estimate at about 1.40. I would have liked to see more of a pullback from the highs before jumping into this but if speculative plays in the alcohol space is the name of the game this is one of the only games in town.

Davis Freeberg said...

Thanks for the suggestion Chris. I will take a closer look at the company. I'm always a little gun shy about buying at the highs, but don't mind paying a premium, in the right situation.

The numbers don't look outrageous, but it would be nice if I saw a little dividend yield to go with the multiples. Even good companies will have their bad days in the market. At the very least, this deserves a little bit of attention on my radar. Some people don't like buying in the middle of a storm, but I don't mind bottom feeding and waiting out the turbulence. If we see a little selling, it may be worth further consideration. Thanks for the suggestion and good luck with the blog.