If you invested in Beam (NYSE: BEAM) exactly three years ago, then you have seen an 88% gain before dividend payments. While that isn't spectacular compared to many other stocks throughout the broader market, it's still nothing to complain about. Instead of complaining, you might as well pour yourself a bourbon, kick back, and reflect on your increased net worth. If you choose this course of action, good for you, but don't get too comfortable.

Beam me sideways, Scotty

While 88% over a three-year time frame is impressive, the stock has only appreciated 3% year to date. This might still be a gain, but it's not as impressive as peer performances. For example, Diageo (NYSE: DEO) has appreciated 9%, and Constellation Brands (NYSE: STZ) has delivered a 55% gain. And if you're wondering about dividends, Bean currently yields 1.40%, whereas Diageo yields 2.90% and Constellation Brands offers no yield.

Beam has seen gains this year thanks to growth, but the pace has slowed. Beam has cited slowing growth in the United States, Europe, and emerging markets. However, Jim Beam, Maker's Mark, and other core brands remain in high demand. Beam believes it's capable of delivering continuous profitable growth by marketing the brand in established and emerging markets. At the same time, Beam will look for more effective ways to get its products to the market. Furthermore, Beam is counting on innovation to improve its top line. A lot of companies say they're innovative, but only some deliver. Beam has innovated recently with Jim Beam Honey and Sauza Sparkling Margarita.

Going forward, Beam will have to contend with higher raw material costs and the negative impact of foreign exchange. The latter is important because 45% of Beam's business is international. If the consumer happens to weaken and these two headwinds play a role, then Beam will find itself in a pricing pressure situation. In other words, the company won't have the ability to increase prices.

In the second quarter, net sales jumped 7% year over year, but part of this was due to the acquisition of Pinnacle Vodka. That said, volume and prices improved. Comps increased 5%, stemming mostly from higher volumes.

Overall, Beam sees growth opportunities via innovation and expansion. On the other hand, growth has slowed and several headwinds are concerning because they have the potential to lead to pricing pressure. Perhaps a better investment option exists.

Peer comparisons

Beam looks marginal on a fundamental basis when compared to peers:

 

Trailing P/E

Net Margin

ROE

Dividend Yield

Debt-to-Equity Ratio

Beam

25

15.35%

9.05%

1.40%

0.53

Diageo

19

21.74%

34.78%

2.90%

1.28

Constellation Brands

28

13.01%

13.92%

None

1.71

Source: Zacks.com

Diageo is clearly the most impressive on a fundamental basis. It has the highest net margin (percentage of revenue turned into profit), the best ROE (percentage of investor dollars turned into profit), the biggest yield, and it's cheaper than peers at 19 times earnings.

Diageo is a much larger company than Beam, and it has seen pricing power and favorable product mix in emerging markets. Volumes have increased, and the company is now focusing on its highest-margin products in order to cut costs and improve the bottom line.

Constellation Brands recently acquired Grupo Modelo's U.S. beer business, which greatly increases the potential of what is already the largest wine producer in the world. Constellation Brands also has a solid history of beating expectations.

It might seem as though all three companies offer quality investment opportunities, but the truth is that the industry tends to trade together for the most part. In most economic environments, all three companies would present quality investment opportunities. However, this isn't what you would call a normal, or even remotely predictable, economic environment and stock market. The problem is that none of these stocks offer resiliency. Pay attention to the plummeting stock prices in 2008/2009:

BEAM Chart

BEAM data by YCharts

Some investors might say that we will never see a market drop of that magnitude again, but since anything is possible at any given time, it's always wise to protect your capital.

Conclusion

Beam is a steady company with justifiable goals. It lacks resiliency, and better investment options might be available. That said, demand for Beam's products will always exist, and management has done a good job of navigating the company through a challenging economic environment. While downside risks are relatively high for the stock price in the near to medium term, this is a quality company that should reward investors over the long haul. If you initiate a position, strongly consider doing so at a slow and incremental pace. 

 

Profiting from our increasingly global economy can be as easy as investing in your own backyard. The Motley Fool's free report "3 American Companies Set to Dominate the World" shows you how. Click here to get your free copy before it's gone.

Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Beam and Diageo plc (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.