Beer or Liquor? Thoughts on Two Alcohol Stocks (DEO, FMX)

Includes: DEO, FMX, KOF
by: Travis Johnson

What's the most important staple? Beer. And the second most important? Liquor.

To that end, half-seriously, I've been thinking about giving my portfolio a little more stability by picking up some "consumer staple" stocks, since that area is completely unrepresented in my holdings.

Right now, Diageo (NYSE:DEO) is looking like a good liquor candidate, though I'd prefer to see it a little cheaper. I'm very impressed by their brands and the international growth thereof, and have been a happy consumer of Johnnie Walker. Jim Cramer actually spoke about this recently, saying he liked the graduated offerings of Diageo, as exemplified by the Johnnie Walker spectrum. Cheapskates like me can drink the Johnnie Walker Red, those who grow in income can move up to Black, Green, Gold and probably other colors they won't even share with the likes of me.

I've been to several Johnnie Walker tastings and the marketing they put forth to genuine scotch fans is certainly impressive. They follow similar strategies with their other brands, and with the world in love with hard liquor and hard liquor-branded soft drinks (like all those strange Smirnoff and Bacardi "malt beverages"), Diageo seems well positioned for the growing base of world alcohol consumers. That, and they pay a very nice dividend ... the two things holding me back a little are the price, which is fair but not cheap, and the size of Diageo -- I hate to overweight my portfolio too much on these $50 billion-plus stocks when I believe growth is much more likely to come from small and mid caps.

With the world in the state it is, shouldn't we all be drinking a little more? Alcohol makes a nice counter-cyclical investment in some ways, too, since I know that I, at least, am more likely to drink to excess after being laid off than before.

And on the other critical consumer consumer staple, beer, I'm very intrigued by FEMSA (NYSE:FMX) in Mexico. This is a business comprised of integrated operations including can manufacturing, soda bottlers, beer brewers, and convenience stores under one roof. This conglomerate goes by several names so you'll see them referred to by the acronym FEMSA most frequently, but the spelled out version is Fomento Economico Mexicano and the translation is Mexican Economic Development, Inc. Don't get them confused with Coca Cola FEMSA (NYSE:KOF), which is one of their partially owned subsidiaries and is the biggest bottler in much of Latin America.

FEMSA is, like Diageo, not super cheap. But what they have going for them is vertical integration in Mexico and a good presence across Central and South America in all kinds of beverages. Beer sales in the US are declining somewhat due to increased demand for wine and liquor and alcoholic novelty drinks, but they're still climbing in Mexico and elsewhere in Latin America. My guess is that the downtrend in the US is temporary.

So why am I not buying Bud or Miller or one of the other big international brewers? I think the upside with FEMSA is more impressive at the moment, and I like their distributed operations. With FEMSA you get not only the brewer (with produces Dos Equis, Tecate, etc.), but also part of the Coke bottler (which handles all kinds of non-alcholic beverages), a can manufacturer, and Mexico's biggest network of convenience stores which, one might imagine, work hard to sell their own brands of beer and cola. So we've got the whole operation -- in comes water, other ingredients, and energy, and out go popular branded products direct to consumers, with no middlemen required (of course, they sell in lots of other places aside from their own convenience stores, so there are other retailers and distributors involved as well).

FEMSA is a huge presence in Mexico, fighting with Grupo Modelo (Corona and Modelo brands) for the Latin American market and, especially since NAFTA, for the growing US market for Mexican beer. Dos Equis and Tecate are catching up and working with Heineken on distribution in the US, though they're nowhere near to catching up with Corona, the most popular imported beer here (which a while back supplanted Heineken, coincidentally). The growing US Hispanic population and the general US interest in different beer tastes are building the market here, and that's some nice upside to consider for the future.

Any comments on those or other candidates in the booze space are welcome. I don't expect that I'll be making any decisions too quickly.