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Beam Inc. (BEAM): Price Reflects Demand Growth

 February 13, 2013 09:24 AM


(By Kevin Donovan)  To bourbon lovers it's a crime equal to that of Harry Lime, the postwar Viennese entrepreneur who cornered the market in penicillin and watered it down to profit from infection in "The Third Man."  But Beam Inc.'s Maker's Mark brand has a higher-class problem – stronger demand  than it foresaw for its premium Kentucky whiskey.  For investors, we think the stock is fairly priced.

However, we would be buyers on a dip to the mid-$50s or lower from the current price of about $61 per share.  The stock has traded between $52.50 (reached late last year) and $63.32.  The stock could make sense for income investors looking for a relatively nonvolatile dividend payor.  The current payout yields 1.50%.

Our reluctance to buy the stock now is based on valuation, not the business outlook for Beam.  Beyond the square-bottled, red-wax sealed Maker's Mark, Beam also distills its popular cheaper bourbon brand Jim Beam, as well as other spirits, and the company is expected to log revenue growth of more than 7% in 2013, according to the average analyst estimate.  Earnings per share is expected to grow 9.6% in 2013.

[Related -BEAM (BEAM) Posts Better-Than-Expected 3Q]

However, we think that projected growth is well-captured in current valuation metrics.   Beam trades at about 25 times trailing 12-months' earnings and 21 times on a forward earnings basis.  The PE-to-earnings growth ratio is a hefty 2.11.

Since bourbon by law must be aged at least two years to be called as such, Maker's Mark, which is aged six years, can't just turn on another spigot, so it's adding water to to its inventory to stretch supply.  The dilution will bring the proof down to 84 from 90, meaning the alcohol content is being dropped three percentage points to 42% from 45%.

[Related -Beam: Bet On Bourbon]

The less powerful version reflects the increasing appreciation worldwide for the all-American beverage of choice.   Combined Kentucky bourbon and Tennessee whiskey sales from producers or suppliers to wholesalers rose 5.2% to 16.9 million cases last year, according to the Distilled Spirits Council, a national trade association that released figures last week.  Revenue rose 7.3% to $2.2 billion, it said.  Premium brands like Maker's Mark, generally made in smaller batches and more dearly priced, led the gains.

Beam Inc. produces and sells branded distilled spirits products worldwide. Its principal products include bourbon whiskey, Scotch whiskey, Canadian whiskey, tequila, cognac, rum, cordials, and ready-to-drink pre-mixed cocktails under the Jim Beam, Maker?s Mark, Sauza, Courvoisier, Canadian Club, Teacher?s, Laphroaig, Knob Creek, Basil Hayden?s, Kilbeggan, Cruzan, Hornitos, EFFEN, Pucker, Skinnygirl, Sourz Liqueurs, Pinnacle, and Calico Jack brands. The company sells its spirits products primarily through direct sales forces to distributors, as well as through joint ventures, third-party distributors, and global or regional duty free customers. The company was formerly known as Fortune Brands, Inc. and changed its name to Beam Inc. in October 2011. Beam Inc. was founded in 1904 and is headquartered in Deerfield, Ill.

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