80 Proof with a PE Ratio of Less Than 11: Jim Beam
Let’s face it, the performance of major world stock markets over the past year is enough to tempt even the abstainers out there to pour a drink to drown their investing sorrows.
And while your nursing one, you might want to take a look at how the big booze companies -- spirits being the politer moniker -- are bucking the trend. The likes of Diageo (DEO), Constellation Brands (STZ), Brown-Forman (BF.B) and Jim Beam (BEAM) are feeling no pain.
Brown-Forman (signature lines include Jack Daniels and Southern Comfort) and Diageo ( Johnnie Walker, Crown Royal, Smirnoff ) both trade at price/earnings ratios north of 25, which seems a tad rich today. Constellation’s trailing p/e is a below-market 10, but the big price spike in the above chart is the result of late-June news that Constellation will pay $1.85 billion to take full control of Mexican beer brewer Crown Imports from Anheuser-Busch InBev (BUD).
That brings us to Jim Beam. You, no doubt, are familiar with the iconic bourbon, but until last year the business was part of an odd conglomerate that operated as Fortune Brands. That is, until hedgie William Ackman took a big position in Fortune in 2010 and started agitating to break the conglomerate apart and let Beam shine on its own.
Beam began trading as a pure-play spirits firm early last October, as seen in this stock chart
Even with that big price run-up, it’s PE ratio is below 11.
In addition to its namesake Jim Beam bourbon, the well-stocked Beam bar includes Maker’s Mark bourbon, Sauza and Hornitos tequila and Courvoisier cognac. In the first quarter of this year, earnings were up 26% and net sales increased 13%. Growth was even stronger in its signature “power” liquors: The Jim Beam and Maker’s Mark bourbons each posted 19% revenue growth in the quarter, and Courvoisier, a big brand in the fast expanding China and Russia markets posted a 41% sales increase.
Operating income has grown at a nice clip since the spin-off.
Though its roots reek of Americana, Beam is pushing to grab new clientele in emerging markets. Its Teacher’s scotch is the market leader in India, and the #2 scotch of choice in Brazil. It’s also pushing to boost productivity. In 2010 Beam produced 10,927 cases per employee. In 2011, that was up to 13,437.
There’s been plenty of buzz that Beam could be a takeover target in the ever-consolidating booze market. At more than six times the market cap of Beam, Diageo is considered a potential suitor. That said, Beam’s recent $605 million cash deal for Pinnacle Vodka, the fourth largest imported vodka in the U.S, lessens the ease and allure of a Diageo deal, given it already dominates the U.S. vodka market with its Ketel One, Ciroc and Smirnoff brands.
The steep run-up in shares no doubt includes a bit of deal speculation that could make the stock susceptible to a pullback if nothing plays out. That said, longer-term, Beam’s inroads in emerging markets where rising disposable incomes in burgeoning middle classes could drive new demand could be worthy of a toast down the line.