Expanding Its Premium Assortment Can Drive Growth For Diageo

This is a challenging time even for the makers of consumer staples, and Diageo (DEO) is no exception, as consumption has dropped significantly outside the U.S., while the U.S. market has held up better so far as customers shift their consumption from bars and restaurants to at-home. Adding to Diageo’s challenges, though, is ongoing evidence of share loss in the U.S., placing even more importance on the company’s ability to drive effective product development, and particularly in the higher-margin premium categories.

Even with some share loss/market shift concerns, I like Diageo as a business. What I like a lot less is that there’s already a pretty healthy quality premium in the share price. Like Constellation Brands (STZ), I believe Diageo is relatively well-positioned to generate attractive long-term free cash flow growth (and strong near-term margins, ROAs, and ROICs), but a prospective total return in the mid-single-digits isn’t so appealing to me.

 

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Expanding Its Premium Assortment Can Drive Growth For Diageo

Heineken Well-Placed And Well-Run, But Also Well-Valued

Inspired by the impending takeover of SABMiller (OTCPK:SBMRY) by Anheuser Busch InBev (NYSE:BUD) (or "AB InBev"), I decided a little while ago to dig around in the beer sector to see if there were good bargains still hanging around. Heineken (OTCQX:HEINY), the world's third-largest brewer, has a lot of positives going for it, including a strong premiumization strategy, declining exposure to weaker markets, and a solid presence in several attractive markets.

What it doesn't have at this point is a discounted valuation. I accept that high-quality companies, particularly those in segments like consumer goods, often trade a premium, but every once in a while, some patience and a contrarian streak can turn up bargains. Priced for a high-single digit annual return, I think Heineken is a solid hold, but certainly not cheap enough to call it a "must buy".

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Heineken Well-Placed And Well-Run, But Also Well-Valued

Seeking Alpha: M&A Could Add Even More Pop To SABMiller

Given the importance of scale and exposure to emerging market growth for global consumer businesses, it seems like a "when, not if" type of question regarding SABMiller's (OTCPK:SBMRY) future involvement in M&A. The key question, though, is whether SABMiller continues to play the role of acquirer and consolidator, or whether the company (likely grudgingly) finds itself scooped up.

Arguably SABMiller doesn't need to concern itself overly much with M&A. The company generates 70% of its profits from emerging markets, the highest such percentage among the major brewers, and is weighed to the lowest per-capita consumption markets (meaning that it can expect to benefit from rising incomes/consumption). Not only that, SABMiller is one of the largest Coca-Cola (NYSE:KO) bottlers and stands to benefit from a new JV in Africa as well as further potential expansion.

With M&A likely to factor heavily in the company's future, a stand-alone valuation may be beside the point. That said, mid-single digit revenue growth and further incremental FCF margin potential do support the stock at this level, with M&A potentially adding revenue (if SABMiller buys) or margin synergy (if SABMiller is a seller) to the valuation.

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M&A Could Add Even More Pop To SABMiller

Investopedia: Constellation Brands Looks To Keep The Recovery Flowing

Change within a company can be difficult, not to mention risky, but Constellation Brands (NYSE:STZ) hasn't shied away from reconfiguration. Once known only for its wine business, the company has an attractive niche spirits business and has ponied up significant capital to take control of its Crown Imports joint venture. While these shares are up strongly over the past year and alcohol-related stocks are doing well now, investors may want to pause to consider the valuation before bidding these shares up further.

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Investopedia: Rumors About A Diageo-Beam Tie-Up Are Interesting, But Not Too Likely

December is the season for rumors in the financial markets, as there's relatively little actual news for reporters and columnists to discuss. With that in mind, a weekend piece in Britain's Sunday Telegraph regarding a potential merger between Diageo (NYSE:DEO) and Beam (Nasdaq:BEAM) should be taken with more than a few grains of salt.

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Seeking Alpha: Does SABMiller Taste Great, Or Is The Valuation Too Filling?

This has been a good year to own companies in the adult beverage trade, as stocks like Anheuser-Busch InBev (BUD), Diageo (DEO), Pernod-Ricard (PDRDY.PK), and Heineken (HINKY.PK) have all outperformed the S&P 500 by a significant margin. The world's second-largest brewer, SABMiller (SBMRY.PK) belongs on that list of outperformers as well, as investors have bid up the shares on improving volume growth and margins. Looking out into 2013, though, the question is whether SABMiller is still poised to be an outperformer.

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Does SABMiller Taste Great, Or Is The Valuation Too Filling?

Investopedia: Brown-Forman May Struggle To Keep This Premium

When times get tough, investors will hit the bottle. Although sales of beer and spirits aren't quite as invulnerable to economic conditions as some investors like to believe, they are a lower-beta product category. All of that said, and allowing for the good success seen lately in promoting new internally-developed products and boosting margins, it's hard to see how Brown-Forman (NYSE:BF.B) keeps its elevated premium for the long haul.

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Investopedia: Diageo Lives Up To Its Billing

I may not love the premiums that alcoholic beverage companies carry today, but I can't fault the underlying premise that these companies pay for their multiples with solid and relatively consistent performance. To that end, while British alcohol giant Diageo (NYSE:DEO) saw some modest erosion in second half growth, the company's performance continues to offer both a port in a storm and leverage to emerging market growth. Once again, though, the question is whether investors ought to pay up for it.

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Investopedia: Brown-Forman Another Example Of Overpaying For Safety

As has been the case with other names in the spirits business like Diageo (NYSE:DEO) and Beam (NYSE:BEAM), investors seem comfortable overpaying to own the stock of Brown-Forman (NYSE:BF.B). Certainly there is a growth angle to this story, as the company looks to extend its world-leading share in bourbon to new markets like China. That said, even high single-digit free cash flow growth isn't enough to push the fair value estimate to an attractive level.

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Investopedia: Premium Spirits Drive A Premium Valuation for Beam

With bad news seemingly rolling in every day about the economic conditions in one part of the world or another, I can understand the flight to quality/consistency that has pushed up some well-known names. But while I understand the appeal of a stock like Beam (NYSE:BEAM), I still don't want to overpay for an asset that is unlikely to bail me out with exceptional growth. So while Beam is certainly a global spirits company worth watching, it will have to pull back a fair bit before the valuation looks truly appealing.

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Investopedia: Central European Distribution Still A Mess

Investors don't have to search especially hard for evidence that liquor and spirits businesses can be ludicrously profitable if run well. Unfortunately, Central European Distribution (Nasdaq:CEDC) shows quite clearly what happens when a business is over leveraged and not run especially well. While there is definitely value in this business, it is very much an open question as to how much (if any) of this value will reach shareholders.

Another Messy Quarter
For a company that may have legitimate "going concern" issues, CEDC's fourth quarter wasn't really all that bad. That said, it was fairly confusing.

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Investopedia: Can Diageo Keep The Party Going?

Right now is a pretty good time to have a global business with valued brands and pricing power. Recent years have proven that demand for spirits is not as inelastic as once conjectured, but Diageo (NYSE:DEO) has nevertheless been a popular stock in a nervous market. Curiously, even as the investors in 2012 have shown more interest in risky names, Diageo has maintained its momentum. The question for investors is how much room is left in this run.

A Strong Fiscal First Half  
So far, so good when it comes to Diageo's relatively ambitious targets for 2012. Organic revenue grew 7% for the first half and while the quarter-by-quarter performance was a little unbalanced (almost twice as much growth in the first quarter), underlying growth was consistent in both. As was the case for Coca-Cola (NYSE:KO) and PepsiCo (NYSE:PEP), 3% volume growth seems like the magic number this quarter.

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Seeking Alpha: Multi-Color - An Emerging Leader In An Unknown Market

Quick! Name a company that manufactures the labels that go on the food, beverages, or consumer goods that you buy at the store every week. The odds are very good that, unless you work in the field, you cannot name one. Product labels are ubiquitous and a $30 billion global industry, but a hugely fragmented market. Multi-Color (Nadsaq: LABL) is looking to change that through a combination of innovative internal product development and acquisitions.

Labels Are Everywhere...
Maybe it's too obvious to point out that almost everything on a store shelf has a label on it. Not only are labels legally required on many products, but labels represent a final marketing touch that companies can use to make their products pop out from the competition and draw the attention of shoppers. While this is a large business, $30 billion worldwide and $9 billion in North America, it is incredibly fragmented – Multi-Color is the #2 player in North America, but holds less than 3% share and is one of only seven companies with more than $200 million in revenue.

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Multi-Color: An Emerging Leader In An Unknown Market

Investopedia: Yet Another Disappointment From Central European Distribution

At some point, a company's travails can no longer be just about a difficult market. Sooner or later, management has to step up, acknowledge mistakes and craft a plan for better results. Although Polish and Russian vodka producer Central European Distribution (Nasdaq:CEDC) still has a lot of inherent value in the business, investors cannot afford to have much confidence in management anymore. Sooner or later, the question has to be asked whether the markets are truly so challenging or whether management simply isn't up to the challenges.

Another Big Miss  
CEDC reported that revenue grew 45% third quarter in 2011 compare to same period in 2010, with 25% value growth in Russia and 7% value growth in Poland. Although volumes were strong in Poland (up 18% compared to third quarther 2010), growth in Russia was just 3% and well below management expectations.

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Investopedia: Constellation Grows By Shrinking

It's not the greatest testament to a business division, when the parent company jettisons it and posts higher profits. Such is the case for Constellation Brands (NYSE:STZ), a company that spent and borrowed too much to expand and is now trying to find a business model that offers better growth and margins for the long haul.

A Fiscal Q2 Better Than Expected 

Constellation's fiscal second quarter results were not great, but they were better than most analysts expected. As-reported revenue plunged 20% (or 21% in constant currency), while organic revenue was basically flat, the difference coming from the divestiture of the Australian and European wine businesses.

Volume was quite mixed. Total North American shipment volume was down almost 2%, as reported, and even worse on an organic basis, which was down almost 4%. Depletion volume, which measures the flow of product from distributors to retailers, was negative in an industry that's showing some modest growth. That said, beer and spirits businesses seem to be doing a fair bit better.

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Investopedia: Diageo Standing Out In A Disprited Market

Normally, booze is a great business. When times are good, people drink to celebrate. When times are bad, people drink to commiserate or forget. Better still, alcohol is expensive, easy to make and requires precious little research and development (though plenty of brand-building and marketing support). And yet, that idyllic reputation isn't working out so well right now. As consumers find their budgets increasingly stressed, they seem to be drinking less and turning to cheaper brands.

That makes Diageo (NYSE:DEO) unusual. While several major alcohol companies have recently disappointed the Street and worried investors with disappointing results and guidance, Diageo seems to be doing relatively well. With good growth in emerging markets, it looks like Diageo can wait out the turbulence in North America and Europe and perhaps add a few more good brands to its world-leading stable. Think of it like Coca-Cola (NYSE:KO) or PepsiCo (NYSE:PEP) for the adult crowd.


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Investopedia: Constellation Waits For The Stars To Be Right

Can the largest publicly-traded wine business regain the shareholder love it once enjoyed? Constellation Brands (NYSE:STZ) rode a heck of a wave as wine consumption took off in the U.S. about 10 years ago and the company acted as a major consolidator. Since then, though, the company has found that its empire hasn't quite validated the debt that underwrote its construction and the stock has not been the winner that its owners may have expected. 


A Sluggish Start to the Fiscal Year
Constellation Brands did not get its new fiscal year off to a roaring start. While reported revenue dropped more than 19%, organic revenue grew about 2%. Shipments fell more than 3%, depletions were down more than 2% and results in wine were generally disappointing. While the company's beer distribution business is doing pretty well, the company is losing some share in wine to the likes of Gallo, Wine Group and Trinchero.

Profitability was a better story, though. Gross margin jumped about five full points and operating income grew 12% from last year's level. Some of this improvement was due to less promotional spending - a mixed blessing that boosts margins but takes a toll on sales growth and market share. 



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Investopedia: Central European Distribution - From Russia, With Disappointment

Although the Russian character is suffused with a grim fatalism, there is also a strong history of resilience in the face of adversity and an unwillingness to back away from a challenge. Though Central European Distribution (Nasdaq:CEDC) is technically an American company, this leading producer and seller of vodka in Russia and Poland may do well to take a page from its customers. While CEDC is a liquor company with real prospects for the future, it has just as many real problems in the present. 


A Bad End To A Hard Year
For much of 2010, Central European Distribution has better resembled the Gang That Couldn't Shoot Straight. Missed, and then lowered, guidance had been an issue throughout 2010 and there was always something else to blame - a cold winter, a hot summer, a tragic plane crash that killed Poland's president, other important government figures, and 96 people in total.

Maybe it should not have been surprising, then, that CEDC would miss again in the fourth quarter. Revenue dropped 11% for the final quarter and certainly missed estimates. This time the company pointed to production problems during the peak selling season as the culprit, but the company did note that volumes increased in Russia by 8% and the company stabilized (and then reversed) market share losses in Poland.


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Investopedia: The Marvel That Is Coca-Cola

By almost any measure, Coca-Cola (NYSE: KO) is a remarkable company. Not very many companies produce long term free cash flow margins of 20% or better, nor consistent returns on invested capital in excess of 20%. Even fewer companies manage to do it in the finicky and price-sensitive world of consumer goods. Consider, too, the fact that Coca-Cola is one of the largest companies in the world and is relatively undiversified, and yet still produces pretty solid growth on a consistent basis.

Even for those who find Coca-Cola to be too boring or too big for the portfolio, there is a lot to learn from following this company and watching how management continues to build value for shareholders.

A Surprisingly Solid End To The Year
From a top line perspective, Coca-Cola had a very good fourth quarter. Worldwide volume increased 6%, or about 5% excluding a deal with Dr Pepper Snapple Group (NYSE:DPS), with decent growth in North America (3%, excluding that deal) and Latin America, but strong performance in Eurasia/Africa and weakness in Europe and Asia. Interestingly, volumes in China were down 3 percent.

Coupled with a 2% increase in price and mix, and 37% growth from so-called "structural changes," Coca-Cola reported revenue growth of just under 45 percent. Excluding all of the special items and changes, core revenue growth of about 8% is still quite good.

In order to really plumb the details of Coca-Cola's earnings statement, readers and investors will probably need a glass of something considerably more potent than soda. For purposes of clarity, brevity and sanity, I will simply focus on some bottom-line adjusted conclusions. Operating income was up about 11%, with adjusted gross margin declining from 65.5% to 61.5 percent. Currency impacts account for how adjusted operating income could outpace revenue growth while the "adjusted" margin declined.


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Breakup Key For Fortune Brands?

Conglomerates are funny things. It seems that if a company can get large enough, say on the order of Danaher (NYSE:DHR) or United Technologies (NYSE:UTX), investors often make their peace with the corporate structure and go about their business. Smaller companies get quite a bit more scrutiny when they are in multiple business lines, though, and the peculiar combination of booze, golf clubs, faucets and front doors always seemed to fuel speculation that Fortune Brands (NYSE:FO) would eventually break itself up into its constituent parts. Years of speculation have finally come true, as the company announced Wednesday morning that it would launch just such a plan.

From One to Three
At this point, it seems as though the board of directors at Fortune Brands has only really decided on the big-picture aspects of the plan. Fortune Brands itself will continue as a publicly-traded company focused on the spirits business. The home and security business (with its leading businesses in faucets, cabinets and doors) will be spun-off to shareholders and become a separate publicly-traded company. The fate of the golf business is less certain - the company will either spin this business off as another publicly-traded entity or sell it outright.

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