2012 has been a good year for Beam Inc (NYSE:BEAM), which produces alcoholic beverages (most notably whiskey under the Jim Beam and Maker’s Mark brands). The stock is up 18% this year, outperforming the market, on the strength of several consecutive earnings beats. This has brought the company’s market capitalization close to $10 billion.
According to Beam Inc’s 10-Q for the second quarter of the year, net sales (revenue less excise taxes) rose 4% compared to the second quarter of 2011. For the first half of 2012, net sales are up 3%. Expenses have also risen, but net income from continuing operations is up a substantial amount no matter which current time period is considered. Last fall, the company (called Fortune Brands at the time) sold its Golf segment and spun off its Home & Security segment into Fortune Brands Home & Security (NYSE:FBHS). Since the company received substantial income last year from these discontinued operations, overall net income declined but this is not something we see as a guide to future financial performance. Over the course of the first half, revenue is about flat in EMEA and ASPA (Asia-Pacific/South America) with North American sales (which are the majority of the company’s revenue) leading growth.
On a forward basis, Beam Inc (NYSE:BEAM) is trading at 23 times earnings, which seems a bit high for a company with fairly low growth and a modest dividend yield of 1.3%. Based on longer-term analyst projections, the five-year PEG is 2. Given that Beam is the result of a breakup of a larger company, it represents a spinout investment, which statistically offers good returns as the management can focus more intently on the problems facing a particular business without having to concern themselves with the corporate strategy of other business units. In this case, however, the market has set high growth targets for the company’s management that the sell-side doesn’t think it will meet. And given the rise in the stock so far this year, it’s possible that any excess spinout-related returns have already been recognized in the price.
The top hedge fund position in Beam according to 13F filings for the second quarter was the 20.8 million shares owned by Bill Ackman’s Pershing Square (find more of Bill Ackman’s favorite stocks), unchanged from three months earlier. Pershing Square had initiated this position in the last quarter of 2011 and at the end of March it was the fourth largest position reported on the 13F. Kenneth Garschina’s Mason Capital Management reported owning 6.2 million shares, a 48% increase from the first quarter of the year. Billionaire Ken Griffin’s Citadel Investment Group also reported a stake in Beam at the end of June, owning 1.2 million shares (see other stocks in Citadel’s portfolio).
The closest public comp for Beam Inc (NYSE:BEAM) is the larger Diageo (NYSE:DEO), owner of a number of alcoholic beverage brand names such as Johnnie Walker, Smirnoff, and Crown Royal. Diageo doesn’t have the spinout factor going for it, but on a quantitative basis it is cheaper than Beam at a forward P/E multiple of 16 and paying a 2% dividend yield. However, Diageo has been struggling with its margins recently and in its most recent quarter it reported somewhat higher revenue but 20% lower earnings compared to the same period in the previous year; with a trailing P/E of 25, an investor would have to be confident in Wall Street’s expectation that earnings will grow nicely next year. Constellation Brands (NYSE:STZ) is another peer. While focused on wine, it also sells some spirits such as SVEDKA vodka. Constellation Brands’ business was stagnant last quarter compared to a year ago but trades at considerably lower multiples: a trailing P/E of 15 and a forward P/E of 12. We would say it is the best value of the three, although its brands are not as strong and at a $5.8 billion market cap it is the smallest of the peers. As an investment, we would probably recommend Constellation Brands over Beam or Diageo unless an investor thinks that Beam can realize even more shareholder value from its spinout.