A persistent recession can leave people melancholy, longing of nostalgia, and wistfully thinking back on better times. This can lead people to drink as well. As investors, we must be perpetually mindful of the future and consider opportunities as they arise. I've heard it said that the best advice for troubling economic times is "drink heavily and recycle." It seems people are following that advice if the growth in these companies' sales is any indication.
With that in mind, let us consider three companies firmly entrenched in the spirits industry, all of which expect to grow in the coming year.
Beam Inc. (BEAM)
Beam is a company that sells premium spirits all around the world. Perhaps its best known whiskey products include Jim Beam and Maker's Mark. Not only does it sell whiskey, but it also sells tequila, rum, cognac, cordials, wine and ready-to-drink pre-mixed cocktails. The stock price has risen 9.6% over the past year, and management believes the company's steady growth will continue.
Beam Inc. was in the news recently when it announced that it was going to be reducing the alcohol content in Maker's Mark, due to concerns over cost margins and inventory, and then reversed the decision to retain the same alcohol content. This could be a sign of Beam management being a bit tin-eared and misjudging how customers would react to the announcement, or it could possibly be the best free publicity scheme since the announcement of "New Coke" and the subsequent return to "Coke Classic."
A look at the Q42012 earnings call transcript from February 1, shows management is quite pleased with growth in 2012. Total revenue grew 7% to $2.5 billion. Earnings Per Share from continuing operations grew 13%, up to $2.40. Net sales grew 6% globally, and in all market segments between 5%-7%.
Looking forward to 2013, Beam Inc. expects to deliver "high-single-digit growth" in Earnings Per Share, that the global market will see 3% growth in value, and that it will deliver $300-$350 million in free cash flow.
The most pressing issues facing the company going forward are the rising costs of raw materials and restructuring of its India operations after a recent internal investigation there. India accounts for approximately 2% of Beam sales.
BEAM increased its dividend to $0.225/share (1.4% yield) in the most recent payout, up from $0.205 for each of the previous four quarters. No plans for the future of the dividend have been announced.
Brown-Forman Corporation (BF.B)
The Brown-Forman Corporation makes premium whiskey and rum, which includes its perhaps two most well-known brands: Jack Daniels and Southern Comfort. The stock price saw a sharp decline in August 2012, due to a 3-2 stock split. Since that split, the stock's price has risen around 6.7%.
Management at Brown-Forman is similarly happy as the earnings call for the second fiscal quarter of 2013 saw an increase in 8% for sales numbers through the first half of the fiscal year. The trademark brand, Jack Daniels, grew 9% in the first half. Gross profits increased a solid 10% in the first half and margins increased 2.6 points.
Their outlook for the rest of the fiscal year is similarly rosy. The company anticipates EPS between $2.58-$2.70/share.
Challenges facing the company in the second half of the fiscal year include a strengthening dollar, inhibiting sales overseas. Additionally, competition in the vodka market is likely to inhibit overall profits. Management also stated that the effects of an increase in the price of its brown spirits is not yet fully accounted for, and it has no intentions of reversing the price increase.
It did also recently announce a $0.255/share dividend for the quarter, with the date of record being March 8, 2013. Brown-Forman has paid out a dividend every quarter for 67 years.
Diageo is a UK-based corporation and its best-known brands include Guiness beer and Johnnie Walker whiskey (a favorite of Winston Churchill). The past year has seen a marvelous growth in the price of the stock (27% over the past year), growth in the dividend, and good growth in both sales and margins. Investors in Diageo have to be pleased as punch, spiked with a little Johnnie Walker, to see these types of returns.
The number nine kept popping up in last month's 2Q2013 earnings call. The operating profit grew 9%. EPS increased 9%, discounting exceptional expenses. The dividend was increased by 9%.
Challenges going forward for Diageo include the strength of the British Pound, which management estimates will reduce profit by GBP 20 million (approximately $30.4 million). It is also seeking to purchase a leading spirits company in India, and that purchase is subject to regulatory approval. There is also the challenge of breaking into emerging middle-class markets.
Diageo's management increased the share's dividend by 9% and reiterated its commitment to it. The dividend is currently $1.1272/share and issued semi-annually. The upcoming ex-dividend date is February 27, 2013.
Three of the leading spirits companies on the planet have shown moderate-to-strong growth over the past year. They show little sign of slowing down as well. While all three companies have their own unique challenges, they have the similarities of good earnings growth and respectable dividends attached to established brands, while also trying to establish new brands as well. Any investors looking to invest in a spirits company should definitely consider one of these stocks for their portfolio.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.