How to Profit from a Whiskey Shortage

Watch liquor stocks Diageo and Brown-Forman on a pullback

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How to Profit from a Whiskey Shortage

Suntory’s Beam sells more than bourbon—its brands include Canadian Club Canadian whiskey, Teacher’s scotch whisky, Sauza tequila, and Courvoisier cognac, among others—but the Beam empire was first and foremost a bourbon story.

A whiskey shortage should mean better pricing for Suntory’s bourbon brands. But unfortunately, this means relatively little for Suntory stock. The Beam acquisition, while accretive to earnings, is small relative to Suntory’s size. Beam’s sales make up about 12% of the combined entities sales.

As a general rule, I love booze stocks as long-term investments. But Suntory is one that I would recommend avoiding. It relies too heavily on a declining Japanese market, and any stock in Japan is subject to massive macro risk (see “Stay away from Japanese Stocks.”)

Enjoy Suntory’s fine selection of American bourbons. But avoid Suntory stock.

Diageo PLC

Next up is one of my very favorite long-term holdings: British-based Diageo PLC, the largest and best diversified spirits group in the world.

Diageo recently began marketing its Bulleit Bourbon and Orphan Barrel brand, making it a strong competitor in the small-batch, high-end segment.  Going a little more mainstream, Diageo also markets its George Dickel Tennessee whiskey and its Crown Royal Canadian whisky, which—while distinctly not bourbon—compete with bourbon among drinkers of sweet North American whiskeys.

Diageo will enjoy fat margins on its new premium bourbons. Of this I have little doubt. Yet, as was the case with Suntory, I don’t see this having a big impact on Diageo stock.

Diageo is best known for its Scotch brands, and specifically Johnnie Walker. And even while bourbon is enjoying an American renaissance, most whisky lovers outside of America prefer scotch. North American sales for all of Diageo’s products make up only about a third of Diageo’s revenues, but emerging markets make up about half.

Bourbon can be found in trendy bars in the developing world. But it is still very much a niche product outside of America, and Diageo’s primary focus is on strengthening its scotch brands in these markets.

So, while I love Diageo stock and continue to recommend it for long-term investors, I don’t see the bourbon whiskey shortage having much of an impact on it.

Brown-Forman

The best-positioned stock to take advantage of the whiskey shortage is Brown-Forman (BF-B), the maker of Jack Daniels Tennessee Whiskey, the most recognizable name in North American whiskeys. Brown-Forman also markets Southern Comfort and a handful of other smaller brands.

At the risk of offending whiskey snobs, Tennessee whiskey and bourbon are almost identical products and both suffer from the same factors causing the shortage. And with Beam now under the Suntory umbrella, Brown-Forman is the only stock that can be thought of as even close to a pure play.

Brown-Forman is a wildly profitable company owing to its branding power. Its return on equity was an impressive 37.5% in the trailing 12 months, and its operating margins a fat 32.3%.

But its current valuation—it trades at 31 times earnings—makes me pause. At that price, you are implicitly expecting one of two things to happen:

  1. The American whiskey boom continues unabated for years…and isn’t replaced by something new and trendy.
  2. Brown-Forman will be acquired by a larger competitor (think Diageo or Pernod-Ricard (PDRDY)).

The first assumption is one I’d be hesitant to make given the whims of fashion. And the second is even less likely. Brown-Forman is family controlled, and in the past the company has very adamant about preserving its independence.

If Brown-Forman had a nice correction, I would recommend snapping up its shares. But while we’re waiting for that to happen, I might instead suggest enjoying a Jack on the rocks this evening to start your weekend right.

Charles Sizemore is the editor of Macro Trend Investor.


Article printed from InvestorPlace Media, http://investorplace.com/2014/05/whiskey-shortage/.

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