Whether from economic worries during a recession or from the desire for a low-cost form of entertainment and indulgence, the sale of alcoholic beverages frequently rises during an economic downturn. Numerous studies have confirmed that expenditures for alcohol are among the personal purchases that are not reduced as a result of the need for families to tighten their belts when hardship hits or is on the horizon.
That is not to say that alcohol-related investments perform well only during tough times. Regardless of economic conditions, people find the consumption of alcoholic beverages, especially beer and wine, to be a source of comfort or an important part of celebrating with friends, or marking a significant event. Companies engaged in the business of producing and/or distributing alcoholic beverages are generally steady earners and performers.
Bond investors should therefore look seriously at this sector, as it is likely to produce more consistent positive returns in the short and the long run than most other options. Among my favorites in this area is Constellation Brands (STZ).
STZ is the largest wine-producing company in the world. The company produces and markets over 250 brands. Constellation has sales presence in 150 countries and produces wines through the full price range from low-cost to premium brands. Among its brands in the wine market are names such as Robert Mondavi, Simi, Wild Horse, Clos du Bois and Ravenswood. Constellation also is the distributor of a wide range of imported beers, including Corona, Modelo, Pacifico and Negra Modelo from Mexico, St. Pauli Girl from Germany and Tsingtao from China.
In addition to being a foremost producer and distributor of these products, the company has benefitted from strong, effective leadership from its CEO, Robert Sands.
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Constellation has recently been successfully executing its plan to increase its EBITDA (Earnings Before Interest Taxes, Depreciation and Amortization) by reducing its outstanding long-term debt. Towards that end, it reduced long-term debt by $400 million during the first two quarters of the company’s Fiscal Year 2009.
The company reported last week that it was reconfirming its Fiscal 2009 earnings advice and expected to withstand the global recession. Sales of its products in the under-$5 range are experiencing strong growth while the sale of the company’s alcoholic beverages in the over-$5 range were seeing a modest decline.
Constellation bonds in the 6-year range with a coupon of 8.375% are trading at under 87, producing a yield of nearly 11.5%. This bond is an example of an investment opportunity that rewards risk at an appropriate level and should be attractive to an investor wary of the perils of the turbulent equity markets we are experiencing today.
This article was written by Jamie Dlugosch, contributor to InvestorPlace.com. For more actionable insight like this, visit www.InvestorPlace.com.
