Everyone’s scared of booze stocks… Why I’m still buyingThis analysis is provided by Eden Bradfeld at BlackBull Research.
One of the things I find interesting is that a lot of people say “why do you like booze stocks so much Eden” and yet many of these same people are at the pub, or buying En primeur from Glengarry Wines. The short answer is — I like stocks that trade at multi-year lows with a predictable product. There is a fairly hysterical article in the FT wondering “Is alcohol the new tobacco?” To which I say, well, tobacco companies are absolute cash machines. The best performing stock in the S&P, of all time, to the best of my knowledge, is Altria.
I know investing in tobacco is not fashionable (and yet, how many people do you see on the street vaping?). I know it goes against “ESG” and the scolds at public health slap you on the hand and say “gosh that is very bad for you!”. But the truth is that tobacco does generate tremendous profits — the net income margin for British American Tobacco is 39.1%. For those in the back, that’s for every $1 you sell, you make 39.1 cents of profit. There’s very few businesses with such fantastic operating margins — Visa’s net income margin is 56%. If I owned only one stock forever, I guess it’d probably be Visa.
My point is — waving your hands about and saying “oh no! Tobacco!” belies the economics of it. The tobacco companies are doing very well, thank you very much. It will come as no surprise that cigarette smoking has been replaced by vaping. To paraphrase Oscar Wilde, news of nicotine’s demise has been greatly exaggerated.
This is not saying to invest in tobacco stocks, but my point is that human habits don’t change. They merely evolve, but the song remains the same.
To be fair — alcohol consumption is declining. But it isn’t declining at a rate that calls for any kind of alarm. Most of the companies I follow — Brown Forman, Diageo, Constellation, etc, reported largely flat sales. It’s also instructive to look to history.
In other words — alcohol consumption has largely normalised in the last few decades. There’s still cause for worry — I think wine is one area of concern, and Cognac is another — both industries need to think about how they introduce younger drinkers to their product. This is why I largely shy away from wine (and why Constellation is selling their wine portfolio). “Evergreens” like Guinness (a Diageo brand) and Jack Daniel’s (a Brown-Forman brand) are predictable.
Once again — a bunch of ratios for ya’ll:
Brown-Forman: 18x fwd earnings
Pernod: 12x fwd earnings
Constellation Brands: 13.25x fwd earnings
And so on… these stocks trade like they are discount retailers in biddlybunk Ohio. They are not. There’s the issue. There’s where value lies. Cigarettes never went away; they became vapes. In my opinion, I don’t see booze going away anytime soon either.
