Beam (BEAM +0.00%), Diageo (DEO +5.32%), and Constellation Brands (STZ +1.66%) all manufacture and sell spirits, but one of them is growing much faster than its peers. Another one offers a generous yield without sacrificing growth. A third is suffering on the growth side, yet a decent yield, a respectable balance sheet, and a strong domestic market position make it somewhat appealing. Which is which? Read on to find out.
The big acquisition
Constellation Brands recently acquired Grupo Modelo's U.S. beer business from Anheuser-Busch InBev. The cost: $4.75 billion. Many investors were concerned about this steep price, and this concern appears justifiable considering that the company is leveraged with $120.90 million in cash and short-term equivalents versus $7.32 billion in long-term debt.
However, this acquisition has led to immediate and significant growth. Constellation Brands recently raised its fiscal-year 2014 adjusted earnings-per-share guidance to $2.80-$3.10 from an earlier expectation of $2.60-$2.90.
This acquisition, combined with new products in wines and spirits, strategic merchandising, and a strong foothold in the domestic wine industry, makes Constellation Brands a highly appealing investment option. While Constellation Brands sports a high debt-to-equity ratio of 1.62, it's still trading at just 18 times forward earnings. As far as growth goes, consider its performance on the top and bottom lines over the past year:
STZ Revenue (TTM) data by YCharts.
If a company can grow its top and bottom lines simultaneously, this is a positive sign.
I have been singing the praises of Constellation Brands since June 20, 2013, calling it "An Alcoholic Beverage Company with Great Potential." Hopefully, at least one reader was paying attention. On the day that article was written, the stock closed at $51.30. It's currently trading at $67.30. In my opinion, there's still more upside potential. However, as always, make sure to do your own due diligence prior to making any investment decisions.
The big player
Diageo sports a market cap of $80.40 billion, making it a much larger company than Constellation Brands and Beam, which have market caps of $12.74 billion and $10.97 billion, respectively. Diageo owns several household name brands, including Crown Royal, J&B, Smirnoff, Captain Morgan, and Guinness. Of these three companies, it has the most marketing power, and it recently made an interesting move: introducing a limited offering of Johnnie Walker Gold Label Reserve in the United States.
Limited offerings have been hot throughout many industries recently, and Diageo is wise to be on-trend. Johnnie Walker Gold Label Reserve is served in a festive gold bottle. Within that standout bottle, says its website, is "a multi-layered blend with a smooth balance of sweet fruits and creaminess" with a finish of "lingering waves of wood, fruit and light, sweet West-coast smoke." .
Since Johnnie Walker is already the No. 1 selling whisky brand in the world, there should be plenty of demand for Johnnie Walker Gold Label Reserve during the holidays.
You might be wondering why Diageo would pull the product if it sees high demand. If people crave more of a certain product, low supply only increases demand, allowing Diageo to continuously innovate with more limited-edition products. In a way, it's like teasing consumers and creating a separate revenue stream.
Diageo hasn't seem the same kind of growth as Constellation Brands lately, but it's still growing:
| Metric |
2011 |
2012 |
2013 |
|---|---|---|---|
|
Total Revenue |
$15,952,000 |
$16,880,000 |
$17,341,000 |
|
Net Income |
$3,238,000 |
$3,250,000 |
$3,934,000 |
Source: Company financial statements.
Diageo is trading at just 17 times forward earnings. The one negative here is that it's also leveraged with a debt-to-equity ratio of 1.28. It does, however, yield 2.90%.
Subpar growth, but outlook good (according to Beam)
Beam recently reported third-quarter results, and they weren't great. Net sales and comps slid 4%, and diluted EPS dropped to $0.52 versus $0.60 in the year-ago quarter. Even if you exclude the early extinguishment of debt and the cost of streamlining operations, diluted EPS came in at $0.59 versus $0.63 in the year-ago quarter. However, Beam does have a respectable debt-to-equity ratio of 0.46.
Beam has seen consumer strength in North America, Europe, the Middle East, and Africa. However, India, South America, and Asia-Pacific have been drags. Beam expects to see improved comps performance in India based on lowered expectations. Over the long haul, it expects its top and bottom lines to show overall growth, with the bottom line growing faster. This is based on strong domestic leadership positions in bourbon, global routes to market, and innovation. However, Asia-Pacific may still negatively impact the bottom line.
Beam is trading at 24 times forward earnings, making it the most expensive investment of the three mentioned in this article. Despite a rosy outlook, if you combine the company's valuation with recent top- and bottom-line performances, it doesn't seem as though Beam offers the most investment potential:
BEAM EPS Diluted (TTM) data by YCharts.
Don't get the wrong idea. Beam is a very well-run operation, and it's highly likely to reward shareholders over the long haul. (A 1.30% yield doesn't hurt, either.) Compare to its peers, Beam doesn't look to be the best investment option of the three at this point in time.
The bottom line
All three companies are likely to be long-term winners. However, if you want the most growth potential, consider Constellation Brands. If you want some growth with broad geographic and brand diversification to go along with a 2.90% yield, consider Diageo. If you're a trusting individual who believes in company projections, then Beam wouldn't be a bad idea, either.
