Investing in Booze? You Should Drink to That

by James Brumley | August 21, 2012 1:24 pm

In a normal environment, I’d be looking for companies and sectors that were growing earnings faster than the rest, trusting that their underlying value eventually would materialize in the stocks’ prices. As we all know all too well, though, this summer has been anything but a normal environment for stocks. In fact, it has been doggone weird[1].

Still, it’s the hand we’ve been dealt. We can complain about it, or we can adapt. I choose the latter.

My adaptation is simple: Rather than finding growing companies and waiting for a sign that those stocks are starting to move, I’m looking for stocks that are actually moving, then checking to see if that bullishness makes sense — a bottom-up approach.

The surprising group topping that buy list? Booze — one of the year’s biggest winners so far.

The average distiller/vintner is up 21% year-to-date, versus the market’s gain of 11%. Constellation Brands (NYSE:STZ[2]) and Diageo plc (NYSE:DEO[3]) have led the way, with respective year-to-date gains of 53% and 23%.

The average brewer is only up 3% since the end of last year, which isn’t great, but even then we can chalk most of the group’s subpar performance up to one name — Molson Coors Brewing Company (NYSE:TAP[4]). Anheuser-Busch InBev (NYSE:BUD[5]) shares are higher by 33% since the end of December, and little Craft Brew Alliance (NASDAQ:BREW[6]) is up 29% for the year so far. And even Molson shares have been on a roll since early June.

Even more amazing is that none of these names have really done anything ultra-compelling to drive the big gains. It just happened by these companies doing what they normally do.

And that might be the most compelling argument of all: That this trend indicates a deeper, philosophical undertow. But first things first.

Nothing to Complain About

Given the underlying results, it’s not hard to understand what’s driving these stocks.

Take Castle Brands (NYSE:ROX[7]) for instance. The purveyor of brand names Jefferson’s (bourbon), Betts & Scholl wines and Tierras tequila posted a 31% increase in Q2’s revenue and a 23% increase in sales volume. On an EBITDA basis, the company swung from a loss of $500K a year earlier to $1.1 million this time around.

Molson Coors saw net sales increase last quarter as well, to the tune of 7% on a YOY basis, while operating income ramped up 12%. Companhia de Bebidas das America (NYSE:ABV[8]), aka AmBev, managed a 10% improvement in Q2’s year over year top line, and a 9% increase in its EBITDA figure. Boston Beer (NYSE:SAM[9]) pushed its operating bottom line higher by 9%, and its sales were pumped up by 10%[10] in the second quarter.

You get the idea: Solid growth is the norm.

Oh, it wouldn’t be fair to say last quarter was chock full of huge, flawless growth, but the numbers still tell a broad story: Most of these brewers and vintners saw double-digit or near-double-digit comps, while the overall market (the S&P 500, anyway) only posted a 1.4% earnings increase and saw flat sales in Q2.

Point being, there’s clearly something booze companies are doing that most other industries haven’t been able to do very well of late — get people to whip out their wallets.

The Real Reason

The numbers all confirm that consumers drank more beer, wine and liquor last quarter than they did in the year-ago period. That’s nothing new. Booze sales are fairly resilient, even in the worst of times. Add in the likelihood that these companies will meet their considerably higher 2013 targets, and it’s not difficult to justify owning a piece of this leading industry now.

What I really want to know is whether this oversized growth rate is in a position to remain this hot. After all, that’s the whole point of paying what some might consider premium-priced P/E levels.

The answer is yes: Alcohol is gearing up for another big year, for a couple of reasons.

The first one is obvious: Contrary to what most of the financial media want you to believe, consumers aren’t dead. If numbers from the Distilled Spirits Council of the U.S. are on target, consumers actually are feeling much better (the ones who are still working, anyway) than they were a couple of years ago. Not only are alcohol sales up about 4% year-to-date, drinkers are gravitating back to premium brands. In fact, premium-label alcohol sales increased by 5.3% in 2011 after falling 3.5% in 2009. “Super” premium alcohol sales ramped up 9% last year.

That might be a tough pill to swallow for investors who are wholly convinced that the average consumer is only interested in stockpiling canned goods for the coming apocalypse. But numbers don’t lie, and consumer trends die hard.

The second reason beer and wine sales are poised to stay strong? It’s considerably less obvious, yet quite logical. Old, unspoken cultural roadblocks that kept so many of the Southeast’s small towns “dry” (or at least dry on Sundays) are falling by the wayside as tax revenue becomes more important than clinging to the good ol’ days.

Only 17 states completely preclude dry communities, leaving the other 33 states to make the wet/dry decision at the city or county level. Regions that have been more dry than not are starting to realize sales of alcohol also are a way of generating much-needed income for financially strapped local governments.

Neither trend is apt to stop anytime soon, making booze stocks the decent bet they seem to be here.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

Endnotes:
  1. it has been doggone weird: http://investorplace.com/2012/08/5-traders-sort-out-this-weird-crazy-market/
  2. STZ: http://studio-5.financialcontent.com/investplace/quote?Symbol=STZ
  3. DEO: http://studio-5.financialcontent.com/investplace/quote?Symbol=DEO
  4. TAP: http://studio-5.financialcontent.com/investplace/quote?Symbol=TAP
  5. BUD: http://studio-5.financialcontent.com/investplace/quote?Symbol=BUD
  6. BREW: http://studio-5.financialcontent.com/investplace/quote?Symbol=BREW
  7. ROX: http://studio-5.financialcontent.com/investplace/quote?Symbol=ROX
  8. ABV: http://studio-5.financialcontent.com/investplace/quote?Symbol=ABV
  9. SAM: http://studio-5.financialcontent.com/investplace/quote?Symbol=SAM
  10. its sales were pumped up by 10%: http://investorplace.com/2012/08/time-to-raise-a-toast-to-boston-beer/

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