A Big Toast To Distillers
With Alcohol Sales Faring Well And Spirits Likely To Do Even Better, S&P Sees Solid Growth For Brown Forman And Constellation Brands
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The Distillers & Vintners index consists of two companies: Brown FormanBF.B; recent price, $55) and Constellation Brands (STZ; $55). Both stocks carry S&P's highest investment ranking of 5 STARS (buy). As can be seen in the chart below, the rolling 12-month relative price performance for this group has exceeded that for the overall market and is in an uptrend.
GRAPE GLUT. As a reminder, the jagged blue line represents the subindustry index's rolling 52-week price performance as compared with the 52-week performance for the S&P 1500. Any point above 100 indicates market outperformance over the prior year, while points below 100 indicate market underperformance. The red line is a rolling 39-week moving average, while the two green bands indicate one standard deviation above and below the subindustry index's 14-year mean relative strength.
This subindustry is followed analytically for S&P by Anishka Clarke, whose outlook for the group remains positive -- reflecting favorable demographics, strong expected consumption trends, and a possible easing in pricing pressures for wine as the oversupply of grapes reverses.
Clarke believes U.S. distilled spirits shipments are likely to post strong gains in 2005 on continued innovations and aggressive on-premises (i.e., bars, restaurants, etc.) marketing to demographic "sweet spots" (first-time drinkers and the 21-29 age group). Although brand investments will likely increase, S&P sees profits from spirits benefiting from pricing and strong demand.
LUXURY'S LURE. Despite a possible stabilization in wine prices as grape costs begin to recover, Clarke thinks wine volumes should see a further rise in 2005, driven by increased off-premise consumption. Despite a possibly weaker U.S. currency, S&P still expects strong competition from imported Australia, Spanish, and Chilean wines. All told, Clarke looks for moderate profit growth, as the beginning of a price recovery, in her view, offsets possible stabilization in grape costs and rising interest rates.
S&P expects further economic growth in 2005 and, as such, looks for consumers to trade up to luxury items. With the demand for premium beverages expected to rise, Clarke thinks companies offering high-end products and selections of imported wines will benefit. Also, S&P expects Americans will continue to dine out more often, contributing to growth in alcohol sales.
HEADY COCKTAIL. Given the trend toward moderation in the highly developed markets of the U.S. and Western Europe for distilled spirits products, many of the leading U.S. alcoholic-beverage companies have diversified their operations in recent years, both geographically and by product line. Longer term, S&P believes the U.S. alcoholic beverage segment should grow slowly, with most of the growth generated from new product activity and penetration into developing regions abroad.
The upshot: Clarke believes the likely outcome of these trends will be a continuation of consolidation for the global alcoholic-beverage group, as players look to build economies of scale and global capabilities, as well as improve pricing flexibility.
So there you have it. From both a fundamental and momentum standpoint, S&P believes the investment outlook for the S&P Distillers & Vintners group is favorable over the coming 12 months.
Industry Momentum List Update
For regular readers of the Sector Watch column, here is this week's list of the industries in the S&P 1500 with Relative Strength Rankings of 5 (price performances in the past 12 months that were among the top 10% of the industries in the S&P 1500) and their proxies (the highest STARS-ranked companies in the subindustry index -- tie goes to the largest market value) as of Mar. 4, 2005.
IndustryCompanyTickerS&P STARS RankRecent Price
Agricultural ProductsArcher-Daniels-MidlandADM3$25
Commodity ChemicalsLyondell ChemicalLYO3$35
Fertilizers & Agr. Chem.Scotts Co.SMG4$72
Home Ent. SoftwareElectronic ArtsERTS4$68
Integrated Oil & GasExxon MobilXOM4$64
Internet Software & Svcs.YahooYHOO4$32
Managed Health CarePacifiCarePHS5$64
Oil & Gas DrillingNabors IndustriesNBR5$60
Oil & Gas E&P Devon EnergyDVN5$48
Oil & Gas Refg., Mktg. & Trans.Valero EnergyVLO4$74
SteelCarpenter TechnologyCRS5$70
TruckingCNF Inc.CNF5$49
Required Disclosures
5-STARS (Strong Buy): Total return is expected to outperform the total return of the S&P 500 Index by a wide margin, with shares rising in price on an absolute basis.
4-STARS (Buy): Total return is expected to outperform the total return of the S&P 500 Index, with shares rising in price on an absolute basis.
3-STARS (Hold): Total return is expected to closely approximate the total return of the S&P 500 Index, with shares generally rising in price on an absolute basis.
2-STARS (Sell): Total return is expected to underperform the total return of the S&P 500 Index and share price is not anticipated to show a gain.
1-STARS (Strong Sell): Total return is expected to underperform the total return of the S&P 500 Index by a wide margin, with shares falling in price on an absolute basis.
As of December 31, 2004, SPIAS and their U.S. research analysts have recommended 26.5% of issuers with buy recommendations, 61.3% with hold recommendations and 12.2% with sell recommendations.
All of the views expressed in this research report accurately reflect the research analysts' personal views regarding any and all of the subject securities or issuers. No part of the analysts' compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.
Additional information is available upon request to Standard & Poor's, 55 Water Street, New York, NY 10041.
Other Disclosures
This research report was prepared by Standard & Poor's Investment Advisory Services LLC ("SPIAS"), and may have been provided to you either by: (i) Standard & Poor's under a license agreement with The McGraw-Hill Companies, Inc., which holds the copyright to this report; or (ii) a Standard & Poor's client who is granted a sub-license by Standard & Poor's. This equity research report and recommendations are performed separately from any other analytic activity of Standard & Poor's. Standard & Poor's equity research analysts have no access to non-public information received by other units of Standard & Poor's. Standard & Poor's does not trade in its own account. SPIAS is affiliated with various entities, which may perform services for companies covered by the recommendations in this report. Each such affiliate is operationally independent from SPIAS.
Disclaimers
This material is based upon information that we consider to be reliable, but neither SPIAS nor its affiliates warrant its completeness or accuracy, and it should not be relied upon as such. Assumptions, opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results.
This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation of particular securities, financial instruments or strategies to you. Before acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice.
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