Suntory's Brand Portfolio Shines, But Its Stock Does Not

About: Suntory Beverage & Food Limited (STBFF), STBFY
by: Holmes Osborne

Suntory owns Jim Beam, Maker's Mark, Kaluha, and many other big brands.

Suntory is the third largest liquor company in the world.

The stock is much cheaper than Diageo and Pernod Ricard but profit margins are far less.

Japan-based Suntory (OTCPK:STBFY, OTCPK:STBFF) is a reasonably priced liquor/beverage company with a nice portfolio of name brands. Some of these brands include Jim Beam, Maker’s Mark, and Kahlua. Compared to Diageo and Pernod Ricard, Suntory’s stock is considerably cheaper, though profit margins are not as nearly as good as the big two. Suntory is the third largest liquor distiller in the world. The company isn't in growth mode, but investors need to understand its portfolio of blue chip brands.

One issue with Suntory is that's it gets most of its sales in slow-growth no-growth Japan. The second issue is that it's profit margins are so much less than than the big two--Diageo and Pernod Ricard.

The stock trades for ¥4,605, there are 309 million shares, and the market cap is ¥1.4 trillion ($13 billion). Earnings are ¥227.32 and the price to earnings ratio is 20.2. The dividend is ¥78 and the dividend yield is 1.69%.

Sales last year were ¥2.35 ($19.7 billion) in 2016 and ¥2.57 trillion ($21.6 trillion) for projected 2019 sales. Nothing to get too excited about. Operating margins are 9.5%. Based upon the stock's price and sales growth, it's sort of reasonably priced.

Suntory owns Jim Beam, Maker’s Mark, Courvoisier, Kakubin, Knob Creek, Bowmore, Canadian Club, Hornitos, Old Crow, Skinny Girl, Old Grand Dad, Blue Curacao, distributes Kahlua in Japan, and many other liquors. The company has a line of beer predominantly sold in Japan. Alcohol accounts for 72% of sales and food and beverage 28%. Japan accounts for 60% of sales, Americas 14%, Europe 13, and Asia and Oceana the rest. What's funny is that most Americans who drink these liquors have no idea that they are owned by a Japanese company.

Suntory is the PepsiCo (NASDAQ:PEP) bottler for Japan, Vietnam, and Thailand. We own stock in several Pepsi bottlers including: Britvic (OTCQX:BTVCY) of England, Ambev (ABEV) of Brazil, and Royal Unibrew (OTC:ROYUF) of Denmark. We used to own Orkla (OTCPK:ORKLY) which was the Pepsi bottler of Norway. The company also is the Subway sandwich franchisor for Japan.

The balance sheet shows ¥272 billion ($2.5 billion) in cash and ¥406 billion ($3.72 billion). The liability side shows ¥530 billion ($4.9 billion) in payables and ¥1.59 trillion ($14.6 billion) in debt. Free cash flow was ¥140 billion ($1.281 billion) last year. The free cash flow yield is 10%. That’s impressive!

The bonds are BBB rates (investment grade) by S&P. Our firm owns several of these issues. A series that matures in about four years yields just under 3%.

What I like about Japanese companies is that they often have portfolios of investments. Suntory holds: Palace Hotel, Hankyu Hanshin Holdings, TOHO Co., The Royal Hotel, and Tokyo Kaikan. As of the last Annual Report, these holdings had a ¥12.6 billion ($115.6 million) value.

CEO Takeshi Niinami was interviewed a few months ago on CNBC. Suntory is working on an “East-West” Kentucky bourbon. Niinami was asked if he was surprised that the interest in bourbon has lasted so long. He replied that he was not. There is a whiskey crisis in Japan. About 15 years ago, cheap liquors entered the Japanese market and the distillers stopped producing whiskey. Therefore, there is not a lot of aged whiskey in the land of the rising sun. Suntory has several Scotch brands and is concerned about Brexit. Suntory does not want to pay high taxes to export to Europe. The EU instituted a 25% tariff on whiskey last year which has cost Suntory.

Suntory has launched a new whiskey named Legent. Legent is a blend between Japanese and American whiskeys. It sells for $35 a bottle.

Let’s compare Suntory to its competitors. Compared to Diageo (DEO), Diageo trades at a price to sales ratio of 6.3 and Suntory 1.7. Wow! Huge difference. Suntory is so much cheaper on that metric. Pernod Ricard (OTCPK:PDRDF, OTCPK:PDRDY) trades at about four times sales. Again, Suntory is so much cheaper. Pernod has an operating margin of 26%, Suntory 9.5%, and Diageo 31.2%. I’m surprised that Suntory’s margins are so much lower than Diageo and Pernod. Perhaps there is some room for cost-cutting.

Morgan Stanley has a price target of ¥5,400. That’s a 17% rise from where the stock is today. Morgan Stanley considers Suntory a growth stock and is optimistic on growth in Asia. Forecasts for FY20/21 in revenues are ¥1.378 trillion ($12.6 billion). Like I said, the stock is somewhat reasonably priced. You're not going to make a bundle in Suntory.

We’re not going to buy the stock. We might at the right price. Liquor and beverage companies are historically very profitable. I suppose there could be some cost cuts but Suntory would have to go a long way to catch up with the big two. Also the growth is not there. Japan is a notorious no-growth country. Despite the incredible portfolio of brands, there are better stocks out there.

Disclosure: I am/we are long BTVCY, ABEV, ROYUF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.