Time To Belly-Up To Booze Stocks?

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While physicians continue to debate the health benefits of drinking alcohol, one thing looks pretty certain: Booze seems to be good for your portfolio. Over the last five years, stocks of alcoholic-beverage makers have produced average annual returns of 12.7%, vs. yearly declines of 0.7% for the benchmark Standard & Poor's 500-stock index, according to UBS. What the statistics underscore is liquor's consistent appeal. Times are good, people drink. Times are bad, people drink -- perhaps even more.

Despite this strong long-term performance, however, shares of booze companies have been a bit groggy in 2003. UBS's "SinDex" of alcoholic-beverage stocks was up only 3% year-to-date as of Oct. 31. By the same date, the S&P 500 had risen an enviable 19%. Beverage companies, traditionally viewed as defensive plays, have largely been ignored in this year's run-up, as investors once again have gone gaga over tech stocks. The alcohol industry has had its problems too. A cold summer was bad for brewers, and a grape glut has kept the lid on wine prices.

Investors could find an upside, however. Several key names in the sector are quite cheap right now, Wall Street pros believe. With the season to be merry not far off, now might be a good time to consider spiking your portfolio with some liquor.

THE HARD STUFF. For starters, investors might want to take a gander at Constellation Brands (STZ), the world's largest wine company. American consumers are growing more upscale in their drinking habits, increasingly reaching for something that can be sipped from a glass rather than guzzled out of an aluminum can. In 2002, consumption of wine and spirits grew at 5.2% and 2.2%, respectively, vs. only 1.3% for beer, according to research collected by Sanford Bernstein and other research firms.

"Vodka brands are starting to gain market share in younger age groups, and wine companies are building share in older age groups," says Robert van Brugge, a Bernstein analyst in New York.

Fairport (N.Y.)-based Constellation's reach is very broad: It makes wines to suit every palate and budget, from cheap table varieties to ultra-premium vintages. This ability to sell wine to all segments of the oenophile population, analysts say, is what distinguishes Constellation from rivals such as Napa Valley-based Robert Mondavi (MOND), which specializes in premium wines favored by the well-heeled crowd.

BROADENING SCOPE. Popular Constellation brands include Almaden, Inglenook, Ravenswood, and Simi. Thanks in part to its $1.4 billion purchase in April of BRL Hardy, a fast-growing Australian wine company, Constellation managed to boost net sales 32%, to $909 million, in its second quarter, which ended Aug. 31.

Hooking up with Constellation should cut BRL Hardy's distribution costs. The acquisition also adds Australia to Constellation's vineyard holdings, which already include properties in California, New Zealand, and Chile. That's a plus because Aussie wines are rapidly gaining market share in U.S. and European markets. "The company has been able to successfully fold in acquisitions, bring down costs, and drive top line growth," says New York-based S&P analyst Anishka Clarke, who rates the stock a buy.

Clarke expects Constellation to earn $2.48 a share in its fiscal 2004 year ending Feb. 28, which would represent 13% year-over-year profit growth. But at $31.59 a share on Nov. 3, the stock remains attractive, Clarke says. Constellation shares could be worth $38 a share, or 20% more, within 12 months, she adds. "Part of the rationale for a buy is that wine consumption growth has accelerated above beer," says Clarke.

SUDS MAVEN. Beer-drinking hasn't entirely gone out of fashion, of course. And if Budweiser is the King of Beers, then Anheuser-Busch (BUD), which makes America's most popular brew, is something of a titan among beer stocks (see BW, 10/10/03, "Why Isn't There a Bigger Head on Busch?"). The St. Louis brewer's dominance -- it has about a 50% share of the U.S. market -- has enabled it to increase prices for six straight years. Rivals can only dream of such pricing power.

Beer still accounts for 60% of all alcohol consumed in the U.S., and no company currently poses any serious threat to Busch, analysts say. The world's second-biggest brewer, SABMiller, is struggling to shore up its Miller brand, which has been losing sales to Bud (the South African company isn't traded on any U.S. exchange). And No. 3 Adolph Coors' (RKY) market share has remained fairly flat in recent years, Wall Streeters say.

What's more, A-B has a knack for concocting products that score big with consumers. Michelob Ultra, its low-carb alternative for Atkins Diet devotees, has already grabbed a 3.1% share of all beer sold in grocery stores after only about a year in production, says John Faucher, a JP Morgan analyst in New York. Faucher has assigned JP Morgan's highest rating of overweight to the stock. (His firm has an investment-banking relationship with Anheuser.)

HOUSE THAT JACK BUILT. Analysts believe all these positives may finally drive up A-B's share price, which has lagged lately. It's up only 4% from the end of last year, to $49.65 on Nov. 3. Todd Stender, an analyst with Crowell, Weedon & Co. in Los Angeles, figures it could be worth $60, or 21% more, in the next 12 months. Among the many other positives, Anheuser is on the record saying it will increase earnings by 12% or so in 2003 and 2004. "Though it's a blue-chip name, it will have double-digit earnings growth for the next two years," he says.

Investors who like the hard stuff might want to peruse Brown-Forman (BFB), the name behind Jack Daniel's Tennessee Whiskey, Southern Comfort, and Finlandia vodka. S&P's Clarke rates the stock only a hold. At $84.32 a share on Nov. 3, its upside is limited, she says. (Clarke doesn't own any stocks of the companies she covers, but S&P may provide services to some of them.)

Still, many analysts like the Louisville (Ky.) company, which did nearly $2.4 billion in revenues in 2003, because it cranks out consistent earnings. Profits for the fiscal year 2004 ending Apr. 30 are seen rising 15%, to $4.19 a share, Clarke says. Although it's highly dependent on the "brown spirits" market, Brown-Forman is larger and more diversified than many of its peers. Among its other product lines are Fetzer wines, Korbel Champagnes, Dansk tableware, and Hartmann Luggage.

AIMING YOUNG. And Brown-Forman's booze business could be set for a nice boost. The company is on the verge of launching what it believes is the first TV ad campaign for vodka, van Brugge says. Increased sales could follow. "Vodka has been the strongest [market share] gainer within the spirits category, particularly among" twenty-something drinkers, van Brugge wrote in a recent research note.

Indeed, the liquor companies that win the battle for the hearts and gullets of this crowd -- young adults with a lifetime of imbibing ahead of them -- will probably be the best investments in the long run. Which is why lacing your portfolio with some of the biggest names in booze could add some kick to its performance.