Raise A Drink To These Steady Sin Stocks

Few things in life are certain, but some things always ring true. In the Western world at least, for the best and worst of times, whether you want to drown your sorrows or live the high-life, there is always a reason to have a drink. Granted, we may have moved on from the days of high-fliers having liquid lunches, towards a more fitness oriented world, yet it is hard to imagine the big alcohol companies ever worrying about having a market for their wares. In this article, we take a look at four alcohol stocks, considering their year-to-date, and ask whether they might be worth adding to your portfolio: Diageo (DEO), Constellation Brands (STZ), Brown-Forman Corporation (BF/B) and Suntory Beverage & Food Ltd. (STBFY), which is not a pure play.

 

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Diageo, Constellation, Brown-Forman, and Suntory Beverage & Food Ltd.

Although alcohol stocks can be seen as defensive purchases, and as useful stocks to own during a period of volatility, there is no harm in having a stake in a company that, whilst not likely to break-out into Facebook (FB) style growth, can provide some stability for your portfolio when paired with  riskier holdings. Such stocks, potential steady-Eddies, may even offer a little bit more. After all, an average of 15% share price growth over the past year for the four stocks this article considers, whilst not spectacular, is certainly a fair return. The year-to-date figure is even better at 24.4%.

Although alcohol stocks can be seen as defensive purchases, and as useful stocks to own during a period of volatility, there is no harm in having a stake in a company that, whilst not likely to break-out into Facebook (FB) style growth, can provide some stability for your portfolio when paired with  riskier holdings. Such stocks, potential steady-Eddies, may even offer a little bit more. After all, an average of 15% share price growth over the past year for the four stocks this article considers, whilst not spectacular, is certainly a fair return. The year-to-date figure is even better at 24.4%.

Average Price Targets for shares in four companies, DEO, STZ, BF/B, STBFY, including highs, lows, and average, in dollars and percentage rise or fall, and average percentage rise or fall overall. Source: FT/Marketbeat

Average Price Targets for shares in four companies, DEO, STZ, BF/B, STBFY, including highs, lows, and average, in dollars and percentage rise or fall, and average percentage rise or fall overall. Source: FT/Marketbeat

Of the companies considered in this article, their average market capitalisation stands at some $40.024bn, with Suntory being the smallest company in such terms, at $13.831bn, and Diageo the largest, at $83.930bn. Each company’s P/E ratio stands in the mid-twenties, to the early thirties, which seems reasonable for assets in a mature market predicted to grow at a steady as she goes 2% a year until 2020. The stocks all issue a dividend, with the average rate being 1.7%, whilst an averaged price target, compiled from analysts’ forecasts in the FT and Marketbeat suggests further share price growth of around 8% is on the cards. Such growth, in a mature market expected to be worth some $1.7tn by 2021, is solid.

Constellation Brands

STZ Share Price, in

STZ Share Price, in

Constellation Brands is one of the world’s largest alcoholic beverage companies, and has one of the largest market shares of all beer companies. The company is based in New York, has a market capitalization of $40.617bn, and offers a dividend of 1%. EPS Figures are solid at $8.11, and the companies P/E ratio of 25.6 is in line with industry norms. In terms of its share price performance. Constellation has seen both a strong yearly and year-to-date performance, of +22.64% and +35.44%, respectively.

With more than 100 brands in its portfolio, and Corona possibly its most globally famous, the 72 year old company has also been active in M&A this year, having acquired the Funky Buddha Brewery, demonstrating Constellation’s desire to further tap into the craft-beer market. The company is also one of the world’s largest wine distributors, with brands such as Clos du Bois. There are of course issues for the company to consider, including Trump’s potential border taxes’ potential impact on the Mexican-U.S. beer trade, and the company’s debts, which some have suggested could hamper it in the medium term, especially with regards to potential expansion plans.

Constellation Earnings + Forecasts. Source: FT

Constellation Earnings + Forecasts. Source: FT

In terms of its current performance, Constellation is, it’s safe to say, doing well. Its premium beer, spirits, and wine portfolio is driving the company’s growth, and the profit outlook has been raised. Revenues are up 3% year-over-year, income is up 39%, and EPS is up 40%. As CEO Rob Sands notes of his company: “We remain the leader in the high-end of the U.S. beer market, and we are reaping the benefits of our wine and spirits premiumization efforts.” Constellation’s average EPS growth over the past five years of 20.1% suggests the company is well run, although its debt to capital ratio of 52% is somewhat high. Average earnings growth over the past five years stands at 28.64%, and EPS has grown by an average of over 34% in the last two years. Pre-tax profit margins, at a level of 29.74% also indicate the company’s health. Ultimately, if you’re looking for a well-run company in the alcoholic beverage sector, with a clear strategy of premium-brand development, and persistent growth, then Constellation is a company that is definitely worth a look.

Brown-Forman Corporation

Brown-Forman 5 Year Share Price, in blue, vs SPX. Source: Bloomberg

Brown-Forman 5 Year Share Price, in blue, vs SPX. Source: Bloomberg

Kentucky-based Brown-Forman is one of the largest American owned spirits and wine companies. Their brand portfolio includes several big-hitters, from Jack Daniels to Finlandia and Chambord. Still under the control of its founding family, this 147 year old company stands to benefit should industry growth continue. It’s share price is up over 14% in the last three months, above the up-side of the broader industry of 12%. Guidance for 2018 remains positive, as per the company’s most recent earnings call, with projections of up to 5% growth, and EPS guidance has increased by $0.05 to a potential high of $1.95. Sales are up, profits are up, and the company’s operating income is up 14%. Indeed, whilst many price-targets available on the market err on the gloomier side, Brown-Forman’s financials paint another picture.

Price Performance - Three Months - BF/B vs Broader Market. Source: Zacks

Price Performance – Three Months – BF/B vs Broader Market. Source: Zacks

The company’s most recent earnings call was promising, with, for instance, EPS figures up 18% on expected numbers, and 27% year-over-year, whilst annual earnings are growing at an average of just under 6.5%. Quarterly revenues compared year-over-year are up 5%, however yearly figures, although meeting forecasts, do show a decline. More positively, dividends grew by 7.63%, and are expected to grow by a further 8%, and the company’s current dividend rate stands at 1.33%.

Brown-Forman’s yearly share price growth of 19.17% is solid, and the year-to-date figure of 22.24% is equally so for the Kentucky company with a market capitalisation of $21.242bn. The company has growth plans based on boosting its core-product offering and expanding its line of premium brands, including the launch of a new Jack Daniels Tenessee Rye that the company has high hopes for.

 

BF/B Earnings + Forecasts. Source: FT

BF/B Earnings + Forecasts. Source: FT

Brown-Forman’s debt to capital ratio is somewhat high at 61%, but there is plenty to like about the company’s longer-term financial performance, inclusive of its ten year EPS growth of 113.7%. More recent earnings growth is steady, if not spectacular, and cash flows remain positive, whilst profit margins are strong, with a three year average of around 26%. Ultimately, coming into 2017, Brown-Forman had some issues. Revenues fell by 3.08%, net income by 37.3%, as did cash reserves, by 30%. That said, the company’s sales and earnings figures are now on the up, and Brown-Forman has been experiencing solid growth over the last quarter, more or less across the board.

If you’re willing to overlook a poor start to the year and see the positives that can be gleaned from the company’s most recent data, Brown-Forman might be set to have a strong 2018. 2017’s bumpy start, combined with low analyst expectations, may make you think twice, but if you’re interested in a long purchase with a slight risk, but strong underlying financials, and a great portfolio of products, Brown-Forman may well be worth your consideration.

Suntory Beverage & Food Ltd.

Suntory Beverage & Food Ltd. - Five Year Share Price,

Suntory Beverage & Food Ltd. – Five Year Share Price

Suntory is, to a degree, this article’s wild card, seeing as they are not a pure-play in the alcoholic beverage sector, as their name suggests. Since it purchased Beam Inc. in 2014, Suntory, a 118-year-old Osakan company, is one of the largest producers of distilled beverages in the world. Its portfolio includes brands like Courvoisier, Sipsmith, Jim Beam, Canadian Club, and a range of upper-middle Scotch names, most notably, if you have an interest in smokier flavours, the Islay-based Laphroaig. One thing that marks Suntory out as potentially interesting is, in fact, this very portfolio. It covers a solid mix of more affordable drinks, such as blended scotch like Teachers, and more select brands, like the aforementioned Laphroaig, or Japan’s Yamazaki. In addition to its liquor offering, Suntory also has involvement in the food sector, inclusive of sandwich chains, and the soft-drink sector, inclusive of brands like Lucozade and Ribena.

Suntory Revenue and Income Data. Source: FT

Suntory Revenue and Income Data. Source: FT

With a market capitalisation of $13.985bn, and slow, but still positive, share price growth of 6.94% in the past 12 months, and 8.81% in the year to date, and a dividend of 1.5%, Suntory is not exactly a “sexy” buy, its whiskey portfolio notwithstanding. That said, if premium brands do continue to show growth, the Japanese company may well be onto a winner in the coming years. Growth forecasts and figures are positive, just not absolutely spectacular. Earnings growth last year came in at 20.71%, and stands at 12.92% this year, whilst the forecast for this metric stands at about 8%.

The company’s earnings call comes in on November the first, so if you feel that Suntory’s more recent financial performance merits an investment, it might be advisable to take an early position. Suntory is profitable, bringing in $423.9m last year, it has solid revenues of some $13bn, and its dividends continue to rise. Debt to capital levels are manageable at 35%, and cash reserves remain in the black.

Effective in cutting costs, with the cost of goods sold as a percentage of sales falling by 1% in the past years, Suntory is a well run company, if not one that is setting the world alight, and with price targets, as contained in this article, showing that the Osakan company looks set to grow, Suntory offers a premium-brand position at a relatively low price, with plenty of potential for steady growth, as a long-term buy.

Diageo

Diageo 5 Year Share Price, in blue, vs SPX. Source: Bloomberg

Diageo probably needs little introduction. The company is one of the industry’s real big-hitters and is almost synonymous with arguably the world’s premier stout: Guinness. The company has a market capitalisation of $85.11bn, offers a strong dividend of just under 3%, and this figure continues to grow. The London headquartered company’s product stable is solid, albeit quite British-centric, and includes several Irish brewed beers, a host of Scotch brands including the Islay-based Lagavulin, and other famous names like Caol Ila and Dalwhinnie, a leading Vodka brand in Smirnoff, gins including Tanquerey and Gordon’s, Captain Morgan’s Rum, and Baileys Liqueur. Diageo’s share price has climbed a strong 23.32% in the past year, and 30.08% in the year to date.

Diageo Income + Revenue Data in GBP. Source: Bloomberg

Diageo Income + Revenue Data in GBP. Source: Bloomberg

There are some arguments that Diageo has already run its latest bull-run, and is now set for a pull-back, so some caution should be exercised before considering a buy, at least at current levels, however the company itself is a solid offering, so taking a long- position, now if you believe there’s more growth to come, or on a dip, is not a poor decision. With a strong portfolio, equally strong revenues of £12.05bn, up 14.93%, and a net income that has risen by 18.63% in the past year, to £2.66b, there’s a lot to like about Diageo. It should also be taken into account that the company plans to run a share buy-back scheme in the coming year, which may well see its share price further climb.

Diageo Earnings History + Forecasts. Source: FT

Diageo Earnings History + Forecasts. Source: FT

Ultimately, whilst Diageo is not posting, at present, exactly the same level of growth figures that companies’ like Constellation may well be, Diageo is growing and it has investment merit, both as a defensive asset, given its excellent product portfolio, and as a long-term grower. Demand for the products Diageo sells is not likely to drop, whilst productivity is expected to improve. This is a healthy state of affairs.

If you are considering an investment in the alcoholic beverage sector, and you want a purchase that is reliable as well as strong, then Diageo is a solid choice. That said, if you’re interested in taking a risk, and seeing a lot of growth, the London-based company may not be for you, nor indeed may any of the sector’s bigger players.

Conclusion

The stocks this article has considered are by no means likely to suddenly boost your portfolio with FANG like growth, but what they can do is provide it with increased diversity in an area with a lot of defensive strength. Given their modest but steady growth, these are long-term stocks to hold, as against investments to buy and flip, and if you’re looking to add some stability to your portfolio, they are certainly worth your consideration.

(By Oisin Breen, Research)

CFDs, spread-betting and FX can result in losses exceeding your initial deposit. They are not suitable for everyone, so please ensure you understand the risks. Seek independent financial advice if necessary. Nothing in this article should be considered a personal recommendation. It does not account for your personal circumstances or appetite for risk.

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