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Is It Time to Drink Up Alcohol Stocks?

17 March 2015 in Trading Ideas

If you enjoyed a pint (or two) of Guinness on St. Patrick’s Day, you weren’t alone.

The beer’s parent company, Diageo, said it was expecting more than 13 million pints of the stout would be drunk worldwide on Tuesday, nearly four times as much as an average day.1

According to a story this week in the Wall Street Journal, that one-day sales boost is especially pronounced in the US, where Irish beer brands led by Guinness combine for $28.2 million in retail sales in March, more than double any other month and 16% of annual US sales.

However, the Journal noted that this is both a blessing and a curse for Guinness, which struggles to maintain drinkers the rest of the year. In the US, which accounts for 16% of Guinness’s global volume, the brand declined by 6% to 107 million liters in 2013.

Fortunately for Diageo, the company has also focused its efforts on capturing one of the liquor market’s biggest current booms: Kentucky bourbon.

Diageo, which owns Johnnie Walker whiskey as well as Bulleit bourbon, said last year it planned to invest $115 million over the next three years to build a 1.8-million gallon distillery.2

According to Diageo, bourbon is the fastest-growing category of spirit in the US, and, as the Journal pointed out, a flurry of cash went into the market a year ago, from Suntory’s $13.6 billion acquisition of Jim Beam maker Beam Inc., to Brown-Forman announcing a $35 million expansion of the distillery that makes Woodford Reserve.

That’s not to say companies focused on other markets aren’t doing well. Late last month, beer behemoth Anheuser-Busch InBev said economic recovery in the US helped offset the impact of a stronger dollar that hurt sales elsewhere, giving its fourth-quarter profit a boost.3

The Wall Street Journal said that the results show that rising employment in the US, combined with the company’s efforts to sell more “premium” beers, is helping turn around AB InBev’s performance in its largest market.

AB InBev said sales volumes in the U.S. rose 0.2% in the quarter compared with a year earlier, reversing a trend of falling volumes.

“Lower oil prices [and] unemployment going down…give us confidence that the industry should continue to get better,” AB InBev Chief Executive Carlos Brito told analysts on a conference call, the Journal said.

Developments in the quarter also showed how the company’s top-selling Budweiser is increasingly becoming a non-American brand. More than 60% of Budweiser sales volume occurs in markets outside the US, such as China and Brazil, both of which showed sales growth due in part to the company’s stronger efforts to push premium brands abroad.

If you’re optimistic about the trajectory for stocks of alcoholic drink producers, you may want to consider the High Spirits motif, which has gained 7.8% in the past 12 months. The S&P 500 has increased 14.3% in that same time. In the shorter term, the motif is off 2.7% in the past month while the S&P 500 is down 0.7% during that same period.

1Tripp Mickle, “Guinness Hopes Its Luck Lasts Longer Than a Day,” wsj.com, March 15, 2015.

2Tom Gara, “Kentucky’s Big Whiskey Investment: Is the Bourbon Boom a Bubble?,” wsj.com, May 29, 2014.

3Matthew Dalton, “AB InBev Profit Lifted by US Recovery,” wsj.com, Feb. 26, 2015.