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This is the first of two parts. Click for part 2

Stocks in the Liquor and Spirits industry have generally performed well over the last two years. Since January 1, 2009, Diageo's stock (NYSE:DEO) has risen 38.7% (US Dollars), Pernod Ricard (OTCPK:PDRDY) has risen 29.6% (Euros), and Brown-Forman (NYSE:BF.B) has risen 35.6%. Constellation Brands’ (NYSE:STZ) stock price increased by 22% over the same period. In Italy, Campari ((OTCPK:DVDCY)) rose by a whopping 89.8% over the same period. The stocks of smaller French spirit makers Rémy Cointreau (OTCPK:REMYF) [+71.9%], Grand Marnier [+12.3%] and Belvédère [+112.7%] also performed well. Over the same period, the S&P 500 index rose by 47%. Most of these stocks have also paid a solid and regular dividend over the past years.

The aim of this article is to provide an overview of the listed companies in this sector. I will also try to analyze the current situation and pricing of these companies. If you are planning to invest in the sector or own shares in one of the mentioned companies, I hope this review will help you.

I have limited myself to companies that exclusively operate in the Liquor & Spirits industry. Companies that have a spirits division, but also derive significant revenue from other businesses, such as LVMH (OTCPK:LVMUY) or Fortune Brands (FO) are thus excluded from this overview. Also not included in the analysis are beer brewers like AB Inbev (NYSE:BUD), SAB Miller (OTCPK:SBMRY), Heineken (HINKY.PK) or Carlsberg (CABJY.PK), whose alcoholic products are in a separate category.

The following table gives the list of companies that are part of this analysis. Only two companies (Brown-Forman and Constellation Brands) are based in the US. The rest of the companies are based in Europe (mainly France). While Diageo has a rather actively traded ADR in the United States, it is highly recommended to trade the mentioned European stocks on their respective home markets as their US listings are very illiquid.

COMPANY

COUNTRY

Main exchange

ISIN

US ticker

Diageo plc

UK

London, NYSE

GB0002374006

(DEO)

Pernod-Ricard SA

France

Euronext Paris

FR0000120693

(OTCPK:PDRDY), (OTCPK:PDRDF)

Brown-Forman corp.

USA

NYSE

US1156371007, US1156372096

(NYSE:BF.A), (BF.B)

Constellation Brands

USA

NYSE

US21036P1084

(STZ)

Davide Campari-Milano SpA

Italy

Borsa Italiana (Milan)

IT0003849244

(OTCPK:DVDCY), (OTCPK:DVDCF)

Rémy Cointreau SA

France

Euronext Paris

FR0000130395

(OTCPK:REMYF)

Marnier Lapostolle SA

France

Euronext Paris

FR0000038036

n/a

Belvédère SA

France

Euronext Paris

FR0000060873

(OTCPK:BVDRF)

Zwack Unicum

Hungary

Budapest, Frankfurt

HU0000074844

n/a

Berentzen-Gruppe AG

Germany

Frankfurt

DE0005201636

n/a


The size spectrum of these companies is very diverse. As the graph below shows, the market is absolutely dominated by Diageo with a market cap of $48bn and Pernod Ricard with a market cap of $25bn. Brown-Forman is a distant third with $9bn. Constellation, Campari and Remy Cointreau have market caps between $3bn and $4bn and make up the middle segment. The rest is made up by the small caps Grand Marnier ($506m), Belvédère ($164m), Zwack Unicum ($130m) and Berentzen ($78m).

companies by market cap

(Click to enlarge)

As many readers might not be familiar with some of these names, here's a brief overview of the main products and brands of the respective companies.


THE LARGE CAPS

DIAGEO

diageo products

Some of Diageo’s products (Source: Diageo website)

Diageo is the proverbial “800 pound gorilla” in the Liquor space. Its brands include names like Smirnoff, Johnnie Walker, Guiness, Baileys, J&B scotch, Captain Morgan rum, José Cuervo Tequila and Tanqueray gin. Diageo has grown its revenues over 9% annually over the past four years, and the financial crisis has not dented its profits, although its profit margin has been decreasing lately. Diageo’s equity ratio is the lowest among its larger peers, the company is leveraged five times. This higher leverage provides a higher return on equity for the company. The higher risk implied by the leveraged balance sheet is somewhat compensated by the very high margins that Diageo achieves for its products.

DIAGEO plc

2006

2007

2008

2009

Revenues ($m)

11,930

12,901

14,848

15,596

Net Income ($m)

2,374

2,413

2,559

2,598

Profit Margin

19.9%

18.7%

17.2%

16.7%

Equity ($m)

6,334

5,522

5,053

6,390

Equity Ratio

28.5%

21.7%

17.6%

20.6%

Return On Equity

37.5%

43.7%

50.6%

40.7%


PERNOD RICARD S.A.

pernod ricard products
Pernod Ricard’s main brands (Source: Pernod Ricard website)


The french company Pernod Ricard SA is the second-largest listed company in the industry. It has grown through acquisitions in the last years, acquiring Allied Domecq (Beefeater, Ballantine’s, Courvoisier, Malibu, Stolichnaya, …) in 2005 for $14bn. It sold some acquired brands to Fortune Brands (FO) and Diageo. In 2008, Pernod Ricard acquired Vin & Sprit (V&S group) from the Swedish government for $9bn. V&S produces Absolut Vodka, which is not one of Pernod’s flagship brands.

Next to the eponymous anisette and pastis brands Pernod and Ricard, well-known brands include Chivas Regal, Jameson Whiskey, Seagram’s gin or Havana Club rum.

Pernod-Ricard SA

2006

2007

2008

2009

Revenues ($m)

8,751

8,949

9,783

9,617

Net Income ($m)

1,129

1,141

1,283

1,292

Profit Margin

12.9%

12.7%

13.1%

13.4%

Equity ($m)

8,543

8,722

10,082

12,390

Equity Ratio

32.3%

34.8%

29.9%

33.7%

Return On Equity

13.2%

13.1%

12.7%

10.4%


Pernod Ricard’s revenues are nearing $10bn after the V&S acquisition. Its net income reached $1.3bn in 2009. Pernod’s profit margin is lower than Diageo’s, averaging 13% over the last four years (500 bps less than Diageo). However, its profit margin has been increasing over the last years. Pernod currently uses less leverage than Diageo, despite the recent acquisitions (Pernod issued about $1.4bn in new shares via a rights issue in May 2009). With an equity ratio exceeding 33%, Pernod Ricard is leveraged about three times.

BROWN-FORMAN CORP.

brown-forman products

Brown-Forman brands. (Source: company website)

The Brown-Forman corporation is the largest American-owned wine & spirits company. Its brands include Jack Daniel’s and Southern Comfort Whisky, Finlandia vodka and Herradura Tequilas. Brown-Forman’s voting stock (BF.A) is controlled by the Brown family, while its class B non-voting stock (BF.B) is more actively traded. The company has grown its revenues by 8.5% annually over the past four years, achieving $2.5bn in sales in 2009. Net income was about $440m in 2008 and 2009.

BROWN-FORMAN CORP.

2006

2007

2008

2009

Revenues ($m)

1,944

2,218

2,582

2,481

Net Income ($m)

320

389

440

435

Profit Margin

16.5%

17.5%

17.0%

17.5%

Equity ($m)

1,563

1,573

1,725

1,816

Equity Ratio

57.3%

44.3%

50.7%

52.3%

Return On Equity

20.5%

24.7%

25.5%

24.0%


Despite having one of the most conservative balance sheets in the industry, with equity ratios above 50%, Brown-Forman achieves an impressive return on equity of about 25%. It also sells products with a high profit margin of about 17%.

THE MID-CAPS

CONSTELLATION BRANDS

constellation products

Constellation Brands products (Source : company annual report)

Constellation is the world’s largest wine company. It has grown through many acquisitions over the past decade, but recently fell on hard times. Its revenues have decreased from over $5bn in 2006 to only $3.3bn in 2009, while reporting heavy losses in 2007 and 2008. In total, the company lost nearly half a billion dollars over the past four years, and its equity decreased by nearly $1bn. By disposing of some brands like the value spirits portfolio in 2009 (which made up two thirds of its spirits revenue), it managed to regain an equity ratio of over 30%. Next to its many wine brands, it sells Black Velvet Whisky, Svedka vodka and Paul Masson brandy.


CONSTELLATION BRANDS

2006

2007

2008

2009

Revenues ($m)

5,216

3,773

3,655

3,365

Net Income ($m)

332

-613

-301

99

Profit Margin

6.4%

-16.3%

-8.2%

3.0%

Equity ($m)

3,418

2,766

1,908

2,576

Equity Ratio

36.2%

27.5%

23.7%

31.8%

Return On Equity

9.7%

-22.2%

-15.8%

3.9%

DAVIDE CAMPARI-MILANO SPA

Campari products

Products of the Campari group (Source: company website)

The Campari group of Italy is controlled by the Garavoglia family, which owns 51% of the share capital. Like most family businesses, its balance sheet is conservative with debt and equity being roughly of the same size. Campari’s revenues have more or less stagnated over the last years, averaging about $1.3bn. However, its net income has grown every year, reaching $186m in 2009, due to increasing profit margins. Campari’s return on equity averaged a solid 14%. Campari sealed the largest acquisition of its history in 2009, acquiring the Wild Turkey brand from Pernod Ricard for $575m. Campari’s major brands include Aperol, Campari, Cinzano, Ouzo 12, SKYY vodka and Rum des Antilles.

CAMPARI GROUP

2006

2007

2008

2009

Revenues ($m)

1,266

1,300

1,280

1,370

Net Income ($m)

159

170

172

186

Profit Margin

12.6%

13.1%

13.4%

13.6%

Equity ($m)

1,081

1,191

1,294

1,417

Equity Ratio

46.1%

51.3%

52.8%

43.9%

Return On Equity

14.7%

14.3%

13.3%

13.1%


REMY COINTREAU SA

Born of the merger of Rémy Martin and Cointreau in 1991, the French company sells the Rémy Martin cognac, Cointreau and Passoa liqueurs, Metaxa brandy, Mount Gay rum and Heidsieck champagne. The company sells about $1bn of spirits annually, and achieved a profit of about $120m over the last years. The last three years saw profit margins of about 11%. Its average return on equity over the last four years was 6.4%, brought down by a net loss of $31m in 2006. Rémy Cointreau’s equity ratio stood at a solid 44% at the end of 2009.


REMY COINTREAU SA

2006

2007

2008

2009

Revenues ($m)

1,067

1,111

970

1,097

Net Income ($m)

-31

134

117

117

Profit Margin

-2.9%

12.0%

12.1%

10.7%

Equity ($m)

1,160

1,238

1,318

1,382

Equity Ratio

38.7%

42.2%

41.9%

43.9%

Return On Equity

-2.7%

10.8%

8.9%

8.5%


THE SMALL CAPS

SOCIETE DES PRODUITS MARNIER LAPOSTOLLE S.A.


Grand MarnierThe Grand Marnier company can claim the title of the most highly-priced stock in the sector. Having only 850,000 shares in issue, the Marnier company trades at a price of 4,380 Euros (nearly $6,000) per share. Its Grand Marnier cognac is responsible for nearly 90% of the company’s sales, the rest comes from sales of Chilean and French wines. The Marnier-Lapostolle company is still controlled by the Marnier-Lapostolle family 185 years after its foundation in 1827.

A bottle of Grand Marnier. (Source: wikipedia)

The company’s revenues have been slightly less than $200m over the last five years. Net income has fallen in the last two years, the company incurred a $29m loss in 2008 and recovered to a $9m profit in 2009. Its historic profit margin of about 13% has fallen to 5% in 2009. Nevertheless, the company has managed to conserve its equity at about $200m and still maintains a very conservative equity ratio of 64%. Return on equity has fallen because of the lower profitability during the last two years.

GRAND MARNIER

2005

2006

2007

2008

2009

Revenues ($m)

187

211

208

186

180

Net Income ($m)

23

28

28

-29

9

Profit Margin

12.3%

13.1%

13.3%

-15.4%

5.1%

Equity ($m)

232

242

195

193

193

Equity Ratio

68.9%

71.8%

63.1%

63.4%

63.5%

Return On Equity

9.9%

11.4%

14.1%

-14.8%

4.7%


BELVÉDÈRE S.A.

Bruce Willis, shareholder of Belvedere
Actor and major shareholder Bruce Willis endorsing Belvédère’s Sobieski vodka. (Source: company website)

Visitors to the website of Belvédère are greeted by the face of award-winning actor Bruce Willis endorsing the company’s Sobieski brand as “the best vodka I know.” In 2009, Bruce Willis struck an endorsement deal with Belvédère which gave him a 3% stake in the company and made the Die Hard actor one of the largest shareholders of the company. So far, the deal has paid of for Bruce Willis – his 83,000 shares are currently worth some $6.5m after a large run-up in the share price over the last months.

Belvédère sells “bison grass” vodka (Wisent), Sobieski and Danzka vodka, William Peel whisky and the brands of Marie Brizard.

BELVÉDÈRE

2006

2007

2008

2009

Revenues ($m)

557

866

1,161

841

Net Income ($m)

16

1

-83

-241

Profit Margin

3.0%

0.1%

-7.2%

-28.7%

Equity ($m)

199

149

0

-241

Equity Ratio

14.6%

10.8%

0.0%

-

Return On Equity

8.3%

0.5%

-

-


The company has been aggressively pursuing credit-fuelled growth since the year 2000, a strategy that worked until 2006, when the share price reached a high of around 200 EUR, rising fifteenfold from its 2001 level. The company fell on hard times after that, and is currently struggling to regain profitability and to escape its creditors, as its equity has mostly been wiped out.


ZWACK UNICUM

Zwack UnicumZwack Unicum is Hungary’s largest spirits company. It is jointly controlled by the Zwack family (50%) and the Diageo company (26%). Next to the national and international production and distribution of its own brands (mainly the famous herbal bitter Unicum), Zwack has the exclusive license to distribute Diageo’s products in Hungary.

Bottle of Zwack's Unicum bitter. (Source: company website)

The company went public in 1993, and has been a stellar performer and dividend payer ever since. To date, the company has paid out approximately six times its IPO price in dividends, and the payout ratio has only averaged about 75% of net income. Shareholder’s equity has been increasing year after year, and return on equity has remained high (above 20%). Zwack’s balance sheet is rock solid with an equity ratio of 75%.

ZWACK UNICUM

2006

2007

2008

2009

Revenues ($m)

98

98

89

74

Net Income ($m)

14

14

15

11

Profit Margin

13.9%

14.2%

17.2%

15.4%

Equity ($m)

59

63

67

55

Equity Ratio

76.1%

74.3%

75.3%

73.1%

Return On Equity

23.0%

22.2%

22.7%

20.7%


The financial crisis has hit Hungary hard, which has obviously been felt in Zwack’s revenues. New excise taxes on alcoholic products in Hungary and less demand for Diageo’s expensive premium brands (as well as a large de-stocking by trade partners) have led to a sharp drop in sales in 2008-2009.

But margins have been maintained, and sales are set to rebound once the Hungarian economy improves. Zwack certainly has the balance sheet so withstand this crisis, as it has the last 170 years. The company was founded by Joszef Max Zwack in 1840, and is still controlled by the Zwacks today. Peter Zwack, who rebuilt the company after the fall of communism, remains honorary president and his son Sandor Zwack is chairman of the board of directors.

BERENTZEN-GRUPPE AG

Berentzen products
Products of Berentzen group (Source: company website)


The Berentzen group is a small-cap spirits & drinks producer from northern Germany. The company produces alcoholic beverages in the lower- to middle price segment. Famous brands include the Puschkin vodka and the Berentzen liqueurs. One of its other main assets is the license to distribute PepsiCo products in Germany. The company has not been successful in the last decade, culminating in the founding family (the company was founded 1758 by J.B. Berentzen) giving up control in 2008. The company is now controlled by the listed investment company Aurelius AG which owns the lion share of voting stock. Only preferred shares without voting rights are listed on German exchanges. The new owners have heavily restructured the company, making the organisation more efficient. In 2009, the company earned a profit for the first time in many years.


BERENTZEN-GRUPPE AG

2006

2007

2008

2009

Revenues ($m)

244

252

270

236

Net Income ($m)

-1

-15

-31

5

Profit Margin

-0,4%

-6,1%

-11,3%

2,2%

Equity ($m)

112

95

65

70

Equity Ratio

43,8%

36,8%

27,8%

38,5%

Return On Equity

-0,9%

-16,2%

-47,2%

7,4%


This concludes the introduction to the listed rather pure liquor & spirits companies. It is probably a good starting point for further research into the individual companies. There is something there for nearly every taste: large-cap growth, dividend stocks, small-cap value and turnaround/workout situations. The next part will analyze the companies as a group, relative to each other, based on various indicators. This should help to crystallize the essence of each stock’s characteristics and its valuation relative to peers.

(Part 2)

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: I am long Zwack Unicum. I have indirect ownership of Pernod Ricard through stock of Compagnie Nationale à Portefeuille (CNP) which controls a significant stake in the company.

Source: Cheers: An Analysis of 10 Liquor and Spirits Industry Stocks - Part 1