Beam Inc BEAM
January 06, 2012 - 12:18pm EST by
2012 2013
Price: 50.62 EPS $2.12 $2.75
Shares Out. (in M): 156 P/E 25.0x 18x
Market Cap (in $M): 7,870 P/FCF 25.0x 18x
Net Debt (in $M): 2,300 EBIT 400 450
TEV (in $M): 10,170 TEV/EBIT 25.0x 22.0x

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  • alcohol
  • Potential Acquisition Target
  • Pricing Power


Beam Inc, the alcohol maker, has become independent following the spin-off of the home products division of Fortune on Oct 3, 2011.

I do not own this stock as a philosophical issue but I am posting to VIC because I believe it is undervalued. I think the market is underestimating the upside of Beam Inc for the following reasons:

While the multiples do not look cheap, stock is cheap because of growth potential for Beam. I am more willing to assign higher multiples to predictable businesses like branded alcohol, which can pass through price-increases in inflationary periods, maintain demand through various uncertain macro environments. And if interest rates continue to be low for a long-time (i.e. Japan-like scenario for the USA), then a 25 times multiple on predictable, growing annual cash flows is really not that expensive.  The positive qualities  of business of alcohol have generally been underrated. This is largely because of the taboo associated with owning "vice" stocks, which means they are not frequently touted in TV shows.  But sharp people like Tom Russo (owned Philip Morris for decades), and Dave Winters (owned tobacco, Diageo and Malaysian casino stocks for decades) have been long-time survivors in the cruel fund management industry because they have a large percentage of their portfolio in "vice" businesses like these.  Name an industry where the players actually advertise to ask people to consume less of, and the business continues to thrive.   There is no generic competition in this business.  Buying branded alcohol businesses is a great way to invest in the growth of the the emerging markets. Beam enjoys the classic behavioral advantages of spin-offs with incentivized management to unlock the value. As a spinoff, they have ability to deploy capital within their core focus - alcohol.  Finally, Beam's smaller market cap and higher growth potential versus bigger players like Diageo makes it a very attractive buy-out candidate.

Started in 1795, Beam is the largest producer of Kentucky bourbon whiskey in a fast-growing segment of the world's largest and most profitable market. Revenue by the makers of bourbon and Tennessee whiskey, the latter of which is dominated by Brown-Forman brand Jack Daniel's, rose 23% in the U.S. between 2005 and 2010, according to Distilled Spirits Council, a trade group. 

Beam lso owns Maker's Mark bourbon and Canadian Club whiskey, Courvoisier Cognac, Sourz liqueurs, among other brands. Jim Beam also owns Teacher's Scotch whisky, a big Beam brand in India. It ranks as the world's fifth-largest liquor company measured by global retail sales, according to International Wine & Spirits Research, a data service.

Beam CEO Matt Shattock is breathing new life and bringing new customers to established alcohol brands.  Jim Beam also owns the very popular "Skinny Girl" Margaritas. They recently just expanded to Skinny Girl Cosmopolitan, and Skinny Girl Sangria.
It is poised to become even bigger with the plant expansions and the recent acquisition of Ireland's largest privately owned distiller - Cooley's distillery - from the Teeling family for $95 million. Cooley – whose brands include Connemara, Greenore and Tyrconnell – is one of only three whiskey producers in Ireland, alongside Irish Distillers Group (IDG), which makes Jameson and is owned by French drinks giant Pernod Ricard, and Bushmills, run by Scotland’s largest whisky maker, Diageo. The global Irish whiskey category grew by 11.5 per cent in 2010 according to figures from Impact Databank.  Commenting on the acquisition,

Chairman John Teeling said: “Beam understands whiskey. They have the culture, experience and global strength to enable the Cooley brands to reach their potential. The renaissance in Irish whiskey, most evident in the United States, is now spreading across the world. Through Beam, our brands will be introduced to a host of consumers. I am certain the marriage between Cooley and Beam will benefit all.”

Matt Shattock, president and chief executive of Beam, added: “Cooley is one of only three sources for Irish whiskey, and the only independent player, so this is a unique opportunity to enter one of the industry’s highest-growth categories.” 

I estimate that Jim Beam will grow revenues 10% annually over the next 3 years. It should exceed the higher end of 2012 revenue estimates and should reach EPS in the $2.75 range.  I estimate that operating margins will increase from current 15% to 18+% over the next 3 years.
Finally, I do not rule out an acquisition by a larger firm like Diageo.



 Acquisitions will increase growth
 Spin-off behavioral dynamics
 Buy out candidate by bigger alcohol firms like Diageo
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