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Drinks shares yield handsome rewards
While most global stockmarkets have enjoyed only pedestrian performances in 2012, just sitting tight on beverage alcohol shares has yielded handsome rewards.
In many cases the returns have been spectacular. The global giant, Diageo, which is now valued at £47 billion, has seen its shares soar by about 30% in 2012; they have also put on more than 70% since their pre-global crisis peak in October 2007. By anybody’s standards, that is a stellar performance, especially as those figures do not take into account the relentlessly rising dividends paid to shareholders throughout the international downturn from consistently increasing annual profits. The balance sheet is also rock solid.
No wonder that Diageo has taken the 2012 title in Management Today’s Most Admired Company in Britain awards, an accolade it also lifted in 2008. The citation says that Diageo’s “impressive growth in emerging markets, some 15% per annum, and continuing success, is a trajectory that many British firms would dearly love to emulate.” Given that more than 40% of Diageo’s sales come from emerging markets, the risk from a further global downturn are diminished. Most brokers rate the company a “buy” and one has put a price target of £23 on Diageo’s shares (compared with today’s £18.50 to £19 range) despite the minor downside of pulling out of links with Jose Cuervo tequila.
Cuervo accounts for just 2% of Diageo’ profits, and while speculation circulates about a possible joint bid to break up Beam Global, Diageo’s Paul Walsh has said firmly that he would only be interested in Jim Beam bourbon. Diageo already has the fast-growing Don Julio premium tequila in its stable and its higher margins will help to repair the dent in profitability after next June when the Cuervo distribution agreement ends. Profitability in the present year will hardly be affected.
But 2013 will probably be a year of consolidation for Diageo. It is likely to be Walsh’s final year at the helm before he hands over to Ivan Menezes. With £2 billion unspent in his back pocket from the failure to buy Cuervo, Walsh has already hinted that he would like to buy the 50% of Ketel One super premium vodka that he does not own. In addition, the group will be bedding down its effective takeover of India’s United Spirits in a deal that should be complete by Easter. Further bolt-on deals, especially in Asia and Africa are likely but nothing transformational – unless LVMH decided to sell its 66% stake in Moet Hennessy.
In 2012, French giant Pernod Ricard, which is now valued at about £23.3 billion, had to contend with not only lacklustre demand in its home market, but also the sudden death of its chairman and driving force for more than 30 years, Patrick Ricard. Having restored its borrowing ratios and debt profile to more normal levels following the 2008 takeover of Vin & Sprit (Absolut), Pernod Ricard’s shares have jumped in 2012 by just under a quarter. The group is determined to maintain its investment grade debt rating (without which many American institutions would not be allowed to back the French group), so no “transformational” deal is likely in 2013, especially as Pierre Pringuet retires at the end of the year when Alexandre Ricard will move into the driving seat. But expect profitability to grow strongly.
The best-performing big drinks company shares in 2012, however, were Constellation Brands, which have soared by more than 70% at the time of writing. Having done much to sort out its Antipodean wine problems, Constellation is now benefiting from higher margins feeding through from the return of American demand. Analysts will examine closely its third-quarter figures when they are announced in early January for signs of further growth and profit consolidation from a stronger portfolio.
In Australia, Treasury Wine Estates, the former calamitous wine arm of Fosters, is another company benefiting from shareholder confidence in its actions to improve margins by cutting out low profitability lines, in its case bulk and low margin wines. The shares have risen by almost 40% in 2012, confounding those analysts who predicted that they would be lacklustre for sometime following the company’s listing as a separate company on the Australian stock market in mid 2011.
Fears about a slowdown in China have pushed Remy Cointreau’s shares below their mid-summer peak, but even so they have gained almost 40% this year as a result of single-minded premiumisation which generated an 80% rise in profitability in the first half. The benefits of September’s £5.8m purchase of Bruichladdich premium Islay single malt have yet to flow through but the addition to the portfolio should begin to be positive in 2013.
Similarly, everyone’s alleged takeover target, Beam Global, has bolstered its portfolio by buying into Irish Whiskey (Kilbeggan and 2 Gingers) and pushed the value of its shares up by approaching 20% this year. They now stand at almost $60, an eye-watering level for any posse of rivals discussing a potential joint bid.
When Beam became a separate company in 2011, it was valued at just over $7 billion but investment bankers now suggest that an offer in excess of $10 billion would be needed for shareholders to give it serious consideration. But at today’s $60, the shares are only $5 off valuing Beam at that level, which leaves precious little takeover premium in the calculations. Little wonder that commentators are quick to hedge their speculation that a break-up bid might be coming with caveats that it might be in the longer term. Meanwhile, expect Beam to further bolster its portfolio – and defences.