Tickers in this Article: BEAM, FBHS, BF.A, BF.B, DEO
Beam (NYSE:BEAM) was formally created on Oct. 4, when Fortune Brands completed its eagerly anticipated breakup. Beam reported third quarter results on Oct. 27, 2011, that marked its first as a pure play liquor company. Despite a lofty earnings valuation, there are a number of ways for patient investors to see a solid return from the stock. (For additional reading, check out: What Is A Pure Play?) Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Third Quarter Recap
Reported sales advanced 6.8% to about $1.6 billion, as the vast majority of Beam's portfolio of alcohol brands reported strong performance. It has designated six lines as "power brands," that includes the flagship Jim Beam. Maker's Mark bourbons, Sauza Tequila, Canadian Club Whisky, Courvoisier Cognac and Teacher's Scotch Whisky also posted 10% top-line growth. A second category of "rising stars" reported impressive growth of 57%, on the back of a nearly 10-fold increase in Skinnygirl cocktails.

Reported operating income fell 57.3% to $73.1 million, but included an $82.9 million charge to break the former Fortune Brands up between Beam and Fortune Brands Home (NYSE:FBHS), as well as sell off the former golf products division. Income from the now discontinued businesses pushed reported net income up to $413.1 million, or $2.67 per diluted share.

Looking at Beam as the standalone unit it now is, management estimated sales grew 10% to $707.3 million, operating income improved 4% to $142.4 million and net income was $83.4 million, or 53 cents per diluted share, to represent year-over-year profit growth of 13%.

For the full year, Beam projects low-single digit sales growth and earnings growth in the high single digits, from the $1.92 it reported in 2010. Analysts currently expect earnings of $2.11 per share.

Given the current profit outlook, Beam trades at a rather lofty multiple of 23.4. Archrival Brown-Forman (NYSE:BF.B) (NYSE:BF.A) trades at a slightly more reasonable multiple of 20.4, while industry giant Diageo (NYSE:DEO) trades at an even more reasonable 17.2.

The Bottom Line
Beam's higher multiple can be justified, in that it counts itself as the fastest growing spirits firm in the U.S. It also has great potential overseas, given a continued trend toward higher end alcohol brands and a growing class of consumers able to afford costlier consumer goods, in developing markets. Management also has a goal to improve profits, by lowering costs at least a couple of percent annually.

Spinoffs in general can be great buying opportunities, as they allow a newly independent management team the freedom and motivation to focus on its streamlined operations. Finally, there is the potential for Beam to get taken out by a larger player, such as Diageo or French spirits giant Pernod-Ricard, which would have to be at a hefty premium to the current share price. (To know more about spinoffs, read: Parents And Spinoffs: When To Buy And When To Sell.)

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At the time of writing Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

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