{"id":36147,"date":"2013-02-12T17:09:35","date_gmt":"2013-02-12T22:09:35","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/?p=36147"},"modified":"2013-02-12T17:09:35","modified_gmt":"2013-02-12T22:09:35","slug":"watering-down-the-whiskey-bullish-or-bearish-for-beam","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2013\/02\/12\/watering-down-the-whiskey-bullish-or-bearish-for-beam\/","title":{"rendered":"Watering Down the Whiskey: Bullish or Bearish for Beam?"},"content":{"rendered":"

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

Southerners are a proud, prickly lot who, not that long ago, used to demand satisfaction for slights real or imagined with pistols at dawn.<\/p>\n

\"An<\/a><\/p>\n

An offended Bourbon drinker demanding satisfaction<\/p>\n<\/div>\n

The executives at Beam Inc, (NYSE:$<\/span>BEAM<\/a>)<\/b> might want to watch out because their decision to water down their premium Maker\u2019s Mark has offended the sensibilities of Bourbon lovers in the South and beyond.<\/p>\n

And why would Beam do such a dreadful , dreadful thing?<\/p>\n

They\u2019re running out of quality aged Bourbon to sell.\u00a0 High-end Bourbon has become so popular, Maker\u2019s Mark lacks sufficient inventory to meet demand.<\/p>\n

Bourbon is a fantastic business to be in.\u00a0 I recently wrote<\/a> about the massive competitive advantages that premier Scotch whisky brands have over their would-be competitors.\u00a0 \u00a0\u00a0Unlike vodka, which can be produced from anything and has no aging requirements, Scotch has incredible barriers to entry.\u00a0\u00a0 A bottle of Scotch worth drinking is filled with whisky that has been aged for well over a decade.\u00a0 Not too many start-up distilleries can afford to wait that long.<\/p>\n

On a side note, once whiskies are bottled, the aging process stops.\u00a0 Wine continues to age after it is bottled, but it is the only alcoholic beverage for which that is the case.\u00a0 So if you have a good bottle of Scotch or Bourbon you\u2019ve been itching to open, go for it.\u00a0 It won\u2019t have value five years from now as a collector\u2019s item.<\/i><\/p>\n

For American Bourbon, the rules are little looser.\u00a0 Unlike Scotch, Bourbon has no required aging period.\u00a0 But a bottle worth drinking has been \u201caged to taste.\u201d\u00a0 And in the case of Maker\u2019s Mark, that aging period tends to be about five to six years.<\/p>\n

If you\u2019re the executives running Maker\u2019s Mark, what do you do?\u00a0 Shorten the aging period and risk lowering the quality of the finished product?\u00a0 Accept shortages?\u00a0 Raise prices and risk losing customers to other brands?<\/p>\n

In the end, management decided that lowering the alcohol content by 3% was the least bad option and that its drinkers would not notice a difference in taste.\u00a0 Other than risking an honor challenge from an offended white-glove-wearing Kentucky colonel, this would seem the least risky course of action.<\/p>\n

Rival Brown-Forman (NYSE:$<\/span>BF_B<\/a><\/b>) lowered the alcohol content of its signature black label Jack Daniels from 86 proof to 80 proof in 2002.\u00a0 It caused a little grumbling but it did no long-term damage to the brand.\u00a0 In the case of Beam and Maker\u2019s Mark, it should be safe to assume the same.\u00a0 If spreading the whiskey a little thinner helps Beam to maintain its high sales growth a little longer, then this is a positive for Beam shareholders.\u00a0 It also suggest that price hikes might be coming next, which suggest higher margins.<\/p>\n

This boom in Bourbon demand is happening alongside a boom in Scotch demand.\u00a0 As I wrote in my last article<\/a>, \u00a0\u00a32 billion in new distillery investment is underway in Scotland, much of it funded by the major brands like Diageo\u2019s (NYSE:$<\/span>DEO<\/a>)<\/strong> Johnny Walker.<\/p>\n

But while the economics of the whiskies businesses have never been better, I\u2019d recommend steering clear of bourbon stocks.\u00a0 Beam and Brown-Forman both trade for 25 times trailing earnings, which is a little too rich for my tastes.\u00a0 I like spirits stocks, but not at any price.<\/p>\n

Diageo is far from cheap at 18 times earnings, but I consider it the safest bet of the three.\u00a0 I\u2019ve owned shares for years, and I continue to reinvest my dividends.\u00a0 But I\u2019m not making any major new purchases at current prices.<\/p>\n

SUBSCRIBE <\/a><\/strong>to Sizemore Insights<\/em>\u00a0via e-mail today.<\/p>\n

The post Watering Down the Whiskey: Bullish or Bearish for Beam?<\/a> appeared first on Sizemore Insights<\/a>.<\/p>\n

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