5/2/2013
By David Urani

Beam Inc. owns a portfolio of liquor brands, several of which have long histories of their own. It all started in 1795 in Kentucky when Jacob Beam sold his first barrel of whiskey, the foundation for Jim Beam. In 1815 Laphroaig was born in Scotland. In 1811 the Courvoisier warehouse was visited by Napoleon who took several barrels, and in 1869 it was named “Purveyor by special appointment to the court of Napoleon III” and also served at the opening of the Eiffel Tower. In 1856 Hiram Walker bought the land that become Canadian Club distillery. Don Sauza started Sauza tequila in 1873 in Mexico. Makers Mark’s roots go back to 1840 by T.W. Samuels. In 2009 they brought on current CEO Matt Shattock, who came in with a global view. In 2010 BEAM spun off from Fortune Brands and they’ve been doing some great things since.

BEAM stock was up after it beat by $0.10 on the bottom line for Q1, posting revenues +8% to $578 million versus the $566 million consensus. They say they delivered “above market growth in North America” which is a nice statement that implies market share increases. In fact, in 2012 Beam’s sales grew at a rate of 6% which was double the pace of the overall 3% growth in the spirits market. It was the largest market share gainer in the industry in the US in both 2011 and 2012. Looking forward, management’s own expectation is for the global spirits market to continue to grow at a rate of 3% this year, and for Beam to outperform it.

Much of their strategy has been based around creating and expanding brands. Whiskey is the hottest segment of the spirits market right now and Beam is better positioned to benefit from that than anybody. Maker’s Mark continues to be a juggernaut, and you may recall during 1Q there was a controversy when Beam announced they would dilute it to keep up with demand; they quickly retracted that statement. Nevertheless, we were somewhat afraid that would damage the brand but if anything people only rushed more quickly to buy it.

Aside from the whiskeys, Beam purchased Pinnacle, the #4 imported vodka in the US, last year and that may continue to be a decent growth driver as Beam leverages it through distribution and advertisement. Additionally, one of the most promising brands for me is Skinnygirl (acquired in 2011), which aims to be a women’s lifestyle brand that covers a variety of spirits. Initial performance of that brand has been great.

Even for established brands, Beam is offering refreshes and innovation. Notably Jim Beam, the company’s biggest brand, has recently been overhauled with the addition of Red Stag and Devil’s Cut varieties which helped to grow brand sales be 10% in 2012 (although it was down 2% in 1Q13).

Global expansion is another focus of Beam’s management; whiskey in particular is not only a hot trend in America but emerging markets are also developing a taste for it. That being said, constant currency sales in the Europe/Middle East/Africa segment were up 1% while Asia Pacific/South America was down 7%. One factor affecting sales was a halting of operations in India for a few months amid internal investigations into trade practices; sales have since resumed there however. We would have liked to see more out of the international operations but do maintain some optimism; take for instance China where in 2012 new distribution lines boosted sales by more than 50%. The Asia segment in 1Q was also up against a strong comparison last year.

With respect to the strong bottom line result, they do say some of the bottom line strength was due to timing of certain costs which they expect to reverse including raw materials orders and advertising. They also saw better mix, particularly with Makers Mark. Looking forward a key point to watch will be how much of a reversal there will be on the favorable cost tailwinds it saw during the first quarter. Beam management is reaffirming their guidance for high-single digit EPS growth for 2013, indicating their expectation for those tailwinds to reverse.

Beam’s 1Q was a continuation of strong sales growth along with consistent execution that has seen it beat the EPS consensus several quarters in a row. The company is nicely positioned in the highlight whiskey niche, and might even be innovating its own growing spirits trend with Skinnygirl. In the meantime, it has plenty of room to expand overseas and is raising brand awareness with a strong ad campaign.

David Urani
Wall Street Strategies