{"id":30598,"date":"2012-07-02T22:08:10","date_gmt":"2012-07-03T02:08:10","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/2012\/07\/whiskey-and-beer-better-long-term-bets-than-wine\/"},"modified":"2012-07-02T22:08:10","modified_gmt":"2012-07-03T02:08:10","slug":"whiskey-and-beer-better-long-term-bets-than-wine","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2012\/07\/02\/whiskey-and-beer-better-long-term-bets-than-wine\/","title":{"rendered":"Whiskey and Beer Better Long-Term Bets than Wine"},"content":{"rendered":"

By The Sizemore Letter<\/a><\/p>\n

It\u2019s not often that a stock with a $5 billion market cap soars by over 20% in a single trading day, but such is the case for Constellation Brands ($<\/span>STZ<\/a>)<\/strong>, the largest publically-traded wine merchant, and now the sole distributor in the United States of Corona and Grupo Modelo\u2019s other Mexican beer brands.<\/p>\n

Constellation was the unexpected winner in the Anheuser-Busch InBev ($<\/span>BUD<\/a>)<\/strong> \u2013 Grupo Modelo merger, as Constellation was able to buy out Bud\u2019s 50% share of the companies\u2019 Crown Imports joint venture for $1.8 billion.\u00a0 Under the new deal, Constellation will have complete control of the distribution, marketing and pricing for all of Modelo\u2019s brands in the United States, while AB InBev will act as supplier.<\/p>\n

The deal is a major coup for Constellation\u2014kudos to management for pulling it off\u2014but the company remains one of my least favorite stocks in the alcohol and vice sphere for a one critical reason:<\/p>\n

Wine is much harder to brand than beer or spirits.<\/strong>\u00a0 Think about it; when you go to a bar, you can instantly recognize your favorite beer or whiskey on tap or behind the bar.\u00a0 Outside of, say, Coca-Cola ($<\/span>KO<\/a>)<\/strong>, beer and spirits are probably the most recognizable and valuable brand names in existence.\u00a0 Not surprisingly, premium beer and spirits businesses tend to enjoy high margins and high returns on equity relative to their peers.<\/p>\n\n\n\n\n\n\n
\n

Stock<\/strong><\/p>\n<\/td>\n

\n

Ticker<\/strong><\/p>\n<\/td>\n

\n

Operating Marging<\/strong><\/p>\n<\/td>\n

\n

Return on Assets<\/strong><\/p>\n<\/td>\n

\n

Return on Equity<\/strong><\/p>\n<\/td>\n<\/tr>\n

AB Inbev<\/td>\n\n

BUD<\/p>\n<\/td>\n

\n

30.19%<\/p>\n<\/td>\n

\n

7.02%<\/p>\n<\/td>\n

\n

16.12%<\/p>\n<\/td>\n<\/tr>\n

Diageo<\/td>\n\n

DEO<\/p>\n<\/td>\n

\n

26.12%<\/p>\n<\/td>\n

\n

10.28%<\/p>\n<\/td>\n

\n

41.07%<\/p>\n<\/td>\n<\/tr>\n

Constellation<\/td>\n\n

STZ<\/p>\n<\/td>\n

\n

18.33%<\/p>\n<\/td>\n

\n

6.23%<\/p>\n<\/td>\n

\n

17.02%<\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

 <\/p>\n

Wine is a different story.\u00a0 The attractiveness of a given vineyard varies from year to year, and few have national or international brand awareness.\u00a0 Wine connoisseurs know their favorite vintages, but there is little brand loyalty at the mass-market level.\u00a0 For a company of Constellation\u2019s size, wine is a much harder business to operate.<\/p>\n

This is not to say that I dislike Constellation or would never consider owning it.\u00a0 \u201cSin Stocks\u201d are some of my favorite long-term holdings due to their defensive nature and due to their tendency to pay high dividends (Constellation currently pays no dividend), and an argument can be made for making room for Constellation in a diversified vice portfolio.\u00a0 But I would definitely give a higher weighting to premium spirits groups such as Diageo ($<\/span>DEO<\/a>), Jim Beam ($<\/span>BEAM<\/a>)<\/strong> and Brown-Forman ($<\/span>BF-B<\/a>)<\/strong>.<\/p>\n

One last thing to note: the Crown Imports deal allows Constellation to get a significant chunk of its revenues and profits from the premium beer segment rather than wine.\u00a0 This is good news.\u00a0 But it\u2019s also a source of concern due to a certain provision in the deal.\u00a0 AB InBev has a \u201ccall option\u201d of sorts to buy the Modelo brands back in 10 years at 13 times earnings before interest and taxes.\u00a0 This price does not at all appear unreasonable, but if exercised Constellation will find itself as purely a wine merchant again.<\/p>\n

Disclosures: DEO and BEAM are held in Sizemore Capital accounts.<\/p>\n

Related posts:<\/p>\n