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Beam Inc.

  • Share Price: $ 51
  • Intrinsic Value: $ 60
  • Buy Below: $ 52

Business description and background:

Beam is one of the world’s leading premium spirits companies. Consumers from all corners of the globe call for the company’s brands, including Jim Beam Bourbon, Maker's Mark Bourbon, Sauza Tequila, Canadian Club Whisky, Courvoisier Cognac, Teacher's Scotch Whisky, Laphroaig Scotch Whisky, Cruzan Rum, Hornitos Tequila, Knob Creek Bourbon, EFFEN Vodka, Pucker Flavored Vodka, Larios Gin, Whisky DYC, DeKuyper Cordials, and Skinnygirl Cocktails. The Beam portfolio includes 10 of the world’s top 100 premium spirits brands and some of the industry’s fastest growing innovations. Beam is focused on delivering superior performance with its unique combination of scale with agility and a strategy of Creating Famous Brands, Building Winning Markets and Fueling Our Growth. Beam and its 3,200 passionate associates worldwide generated 2010 sales of $2.7 billion on volume of 33 million 9-liter cases.

Headquartered in Deerfield, Illinois, Beam is traded on the New York Stock Exchange under the ticker symbol BEAM and is included in the S&P 500 Index and the MSCI World Index.

Thesis

Beam is the world’s fourth largest premium spirits company and the largest US-based spirits company. Its leading brands include Jim Beam bourbon, Maker’s Mark bourbon, Sauza tequila, Courvoisier cognac, Canadian Club whisky, Teacher’s Scotch, Laphroaig single-malt Scotch, Cruzan rum, Hornitos tequila, Knob Creek bourbon, Pucker flavored vodka, and Skinnygirl cocktails. The company’s annual sales were $2.7 billion in 2010 on volume of approximately 33 million 9-liter cases. The company is targeting to deliver growth in adjusted pro forma diluted earnings per share at a high-single-digit rate in 2011. The company is a spin off the erstwhile Fortune Brands. With the benefit of our portfolio transformation from 2005 to 2007, the enhanced routes to market we built in 2008 and 2009, and the turbocharged brand investments behind sustainable growth initiatives we’ve made over the past two years, Beam is ready to accelerate profitable growth as a pure-play spirits business.

Beam Inc plays in a sector that is currently experiencing stable marketing conditions i.e. Spirits, with overall global growth up at a low-single-digit rate, with the U.S. up 2-3%, Europe up 1-2%, and Australia up 1-3%. Based on the guidance given by the earlier owner of Beam Inc, Fortune Brand the price/mix of Beam’s products are very much likely to improve in 2011, as it noted that it will continue to selectively increase pricing of its premium brands in certain states in addition to decreasing the level of promotional spending. Beam Inc has also been making strides to increase its brand investment at a double-digit rate, and it expects its portfolio to continue to gain share. As a result, it expects to deliver operating income growth in the low-to-mid-single-digit range. Accordingly, we estimate sales growth of 5.0% and margins of 22.5%, up 50 bps YOY.

The company’s steady investment in marketing and brand-building programs are adding to the energy around Power Brands like Jim Beam, Sauza and Canadian Club, and Rising Star brands like Cruzan Rum and EFFEN Vodka. In 2010, the company increased its spending towards digital media by 35% to support initiatives including Jim Beam’s multiplatform partnership with ESPN, iPhone apps, and new TV and online advertising for Hornitos tequila.

Canadian Club enjoyed a prominent place in two of the hottest TV series – AMC’s “Mad Men” and HBO’s

“Boardwalk Empire” – and also returned to TV advertising in its native Canada. EFFEN Vodka boosted its profile as the Official Vodka of Mercedes-Benz Fashion Week. And Maker’s Mark launched its first-ever international media campaign in Europe.

In 2010, Beam gained significant momentum in the U.S., where they hold the number two market position, and captured new market share across key spirits categories. Around the world, the company is developing most promising opportunities. For example, in Australia, the world’s #2 bourbon market, Beam is investing to build on Jim Beam’s market-leading position, including expanding Maker’s Mark, Canadian Club and Teacher’s. They outperformed the market in the U.K., Spain and Germany, and grew double digits in developing markets such as India, Brazil and Russia.

Management & Stewardship

The company boasts of extremely talented management from some of the global consumer goods and distilleries organizations such as Unilever, Diageo, Yum, Seagram Spirits etc. Matt Shattock is the President and CEO of the company. With around 25 years of experience in brands such as Unilever, Cadbury, he is responsible for managing more than 100 brands within the Beam’s portfolio. Bob Probst is the CFO of the company who is responsible for the company’s financial operations, strategic development and corporate development. Some of the key board members of the company are David Mackay (Non-executive chairman and former CEO of Kellogg company), Richard Goldstein (Former chairman and CEO International Flavors & Fragrances), Ann Fritz, Pierre Leroy, Matt Shattock etc.

Valuation:

We estimate that Beam Inc. will be able to generate $721mm in EBITDA on revenue of $3.6 billion in 2011:

Based on current and historical valuation range of some of the distilleries the reasonable EBITDA multiple for Beam Inc is in the range of 11x-13X which results in a market valuation of $8-9.3 billion that translates into a price range of $52-$60.

The historical sales and EBITDA growth rate of Beam Inc (as part of Fortune Brands) compared to some of its peers like Diageo (NYSE:DEO) and Brown Forman (NYSE:BF.A)(NYSE:BF.B) are as follows:


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The estimated Return on Invested Capital (NASDAQ:ROIC) of Beam Inc is around 8%. The ROIC seems to be lower than its peers but this will improve as Beam continues to retire its debt as a result of spin off.


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Disclaimer: This discussion is for informational purposes and should not be taken as a recommendation to purchase any individual securities. Information within this discussion and investment determination of the author may change due to changes in investment strategy when warranted by changing market conditions, or if a security’s underlying fundamentals or valuation measures change. There is no guarantee that, should market conditions repeat, this security will perform in the same way in the future. There is no guarantee that the opinions expressed herein will be valid beyond the date of this presentation. There can be no assurance that the author will continue to hold this position in companies described herein, and may change any of his position at any time. We use or best efforts to obtain good data in our models, however it can’t be guaranteed that our inputs and data are correct. This is not a recommendation for readers to purchase shares in the above security without consulting your financial professional to discuss your own risk tolerance and objectives.

Source: Beam Inc.: Punch Drunk Profits