Beam (NYSE:BEAM) announced solid first quarter earnings May 2. The Q1 highlight was the performance of its North American business, which delivered huge sales and profit growth over last year. While its home market is humming, business overseas is less than stellar.
Is its North American success enough to make me a buyer? Read on and I'll give you my verdict.
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Beam's first quarter North American revenues increased by 17.5% on a constant currency basis to $363.5 million while operating income grew 25.4% to $123.6 million. On a comparable basis, which adjusts for foreign exchange and acquisition/divestitures, net sales were up 7% in the quarter on top of a 12% increase in Q1 2012. North America accounted for 63% of its overall revenue and 73% of operating profits. Its biggest segment delivered an operating margin improvement of 210 basis points to 34%.
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Driving revenue growth in the first quarter was a number of things, most notably the 44% increase in comparable net sales for Maker's Mark, which witnessed a spike in sales due to Beam's short-lived plan to reduce the alcohol content in the premium bourbon by three percentage points to 42%. The outcry by customers was loud and immediate prompting management to quickly reverse its decision. In the interim, customers were hoarding cases of the stuff made at 45%, just in case. With shortages of the product ongoing, they'll either have to find more distillery space or more likely play around with the size mix to ensure it has enough product. That means you'll see less 1.75 liter bottles and more of the 750 milliliter variety. What ever it does, the product will still be great tasting.
In its Q1 conference call CEO Matt Shattock mentioned that one out of every three drinks in North America is a vodka brand. Flavored vodka, until recently a small part of that growth, is now a much bigger part of overall vodka sales in North America. Five years ago, flavored vodka represented one out of every 10 cases sold; that's now down to one out of every six. Last year it acquired Pinnacle vodka along with Calico Jack rum for $605 million from White Rock Distilleries. Although Pinnacle offers a regular version of Vodka, its calling card is the 30 or so flavors it offers including Cookie Dough and Cotton Candy. With so much riding on the vodka market, this could turn out to be a very important acquisition for its North American business.
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While Pinnacle achieved 8% net sales growth in the first quarter, the second best performance of its seven power brands, it was Skinnygirl, one of its rising stars that catches your eye with 140% growth. In 2011, Beam acquired the brand from Bethenny Frankel, the former reality TV star, for somewhere north of $46 million. At the time Frankel's only product was a ready-to-drink low-calorie Margarita. Now it has flavored vodka's, a bunch of ready-to-drink cocktails and three varieties of wine. With Beam's management and muscle it's not hard to understand why the brand's seeing so much growth. It's catering to women and winning large.
Rest of the World
Beam's biggest red flag is in India where it's basically had to rebuilt its business from the ground up after a whistleblower exposed some irregularities in its business there. While India only accounts for 2% of its overall revenue, it's a blow to its ambitions in emerging markets. The company intends to generate 25% if its long-term growth from places like India and Russia. With India still being resolved, the emerging markets that appear to be delivering growth at this time include Mexico and China, where it achieved 50% growth in 2012. Although India's got problems right now, its Teachers brand is the number one whisky there and soon Beam will introduce Jim Beam into the country. Overall, business is steady, if not spectacular.
Although its Europe, Middle East and Africa (EMEA) segment saw comparable net sales in the first quarter increase by just 1%, its operating income jumped 42% year-over-year to $24.7 million. Even more impressive was its operating margin of 23.4%, 720 basis points higher than the year before. Its top line might not be exploding, but given the European economy, you really have to like its profitability. Once Europe gets back on its feet growth should resume. The rest of the world accounts for just 37% of revenue and 27% of operating profits. It would be nice if it could boost both of those numbers closer to 50%. That said, it doesn't need to in order to grow as the first quarter demonstrates.
Beam is the fifth largest spirits company in the world behind Diageo (NYSE:DEO), Pernod-Ricard (OTC:PDRDY), Bacardi and Brown-Forman (NYSE:BF.B), maker of Jack Daniel's. Despite the weakness outside North America its business is on solid footing; likely a big acquisition target, it acts as a floor for its stock price.
Year-to-date it's underperforming its wine and distillery peers. Given its strong North American business combined with better prospects overseas in the second half of the year, I'd expect that its stock will be well into double-digit returns by the end of 2013.
So yes, you should buy its stock.
At the time of writing, Will Ashworth did not own any shares in any company mentioned in this article.
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