Four Alcoholic Stocks to Keep Your Spirits Up: DEO, BF.B, BUD, TAP
Alcoholic beverage companies are typically great businesses, Ann Gilpin points out in Morningstar, though the soaring prices of hops and barley will provide some tough challenges. While operational efficiencies will help, Anheuser-Busch (BUD) and Boston Beer (SAM) have both warned that the higher commodity prices will impact on their gross margins as they will not be able to raise prices high enough in 2008 to offset the extra costs.
Molson Coors (TAP) on the other hand is likely to see its gross margins expanding, Gilpin reports, as it enjoys economies of scale in the U.S. market through its joint venture with SABMiller (SBMRY). Boston Beer though will have a tougher time:
Accounting for less than 1% of the U.S. market, the company lacks the advantages its larger peers enjoy in procurement and distribution. Also, Boston Beer is in the middle of a huge brewery expansion in Massachusetts to give it the means to ship 100% of its own products rather than relying on contracts. Like Coors shipping from Colorado, we think Boston Beer's choice to concentrate all three of its breweries in the East was a poor one (Miller currently distributes Boston Beer's products in the West), and we expect shipping costs to escalate.
Premium spirits companies should be less significantly affected by a domestic downturn and are more insulated from spiking commodity prices, according to Gilpin, and for these reasons Morningstar considers Diageo (DEO) and Brown-Forman (BF.B), owner of Jack Daniel's, as having the brightest prospects. Gilpin explains why Diageo, Brown-Forman and Anheuser-Busch were awarded Morningstar's 5-star rating:
Spirits behemoth Diageo has it all: scale, powerful brands, and the best emerging-market presence... The company has certainly had a lot of success in charging $350 for a 750-ml bottle of Johnnie Walker Blue Label, which comes in a silk-lined box with a certificate of authenticity. Its core brands also carry tremendous equity and are growing at double-digit clips in emerging markets.
Brown-Forman is regarded as "an infant version of Diageo" by Morningstar, although its brands - Jack Daniel's, Finlandia, Casa Herradura, and Southern Comfort - do not have the same international presence as those of Diageo:
This is where we see tremendous opportunity for Brown-Forman. While we don't think the firm can reach anywhere near Diageo's scale, we see a wide-open runway for Brown-Forman's brands to really take off outside the United States and for the firm to become a key player on the international-spirits front 10 years down the road.
As for Anheuser-Busch, Morningstar analysts attended the Consumer Analyst Group of New York [CAGNY] conference with some concerns about A-B, particularly as volume growth for its core brands has been "lackluster". Management presentations at CAGNY alleviated these concerns:
It's clear that management is well aware of the problems facing the firm and is committed to turning the ship. A-B is starting to tap the craft beer industry and leverage its unparalleled distribution scale to build a portfolio with faster growth potential.
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