A Tribute To A Modern Day Moonshiner

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Diageo, out of London, is the world’s largest distilling company.  They own distillers all over the world and sell almost $15 billion worth of alcohol every year.  (A far cry from the few thousand dollars Popcorn was probably making.)

Normally a recession causes people to drown their sorrows in drink… but that didn’t happen this time around.  Alcohol sales actually dipped.  You can clearly see it in yearly sales numbers.

However, that’s starting to turn around.

The CEO of Diageo recently mentioned seeing an uptick in business.  He said improving consumer confidence numbers are driving sales higher.  In other words, people are returning to the bars and watering holes again.

While moonshining in the US is illegal, big profits can be made in the industry.

One of my favorite picks in the industry is Constellation Brands (STZ). The company makes distilled beverages like SVEDKA Vodka, Black Velvet Canadian Whisky, and Paul Masson Grande Amber Brandy.  They also have import deals with international brewers for beers like Corona, Modelo Especial, Negra Modelo, Pacifico, St. Pauli Girl, and Tsingtao.

But that’s not all.

Constellation also has a stable of wines including Robert Mondavi, Clos du Bois, Blackstone, Ravenswood, and Jackson-Triggs, just to name a few. All in all, the company offers more than 100 different brands.

While their product list is quite robust, what really interests me is their current valuation.  In my mind, this company is undervalued.

First off, here’s an important note.  Constellation has a March fiscal year end… which means their 2010 annual numbers represent nine months of 2009 and the first three months of 2010.  I know it’s a bit confusing, but bear with me.

Last year was difficult for the industry and the company.

Sales were down and profits suffered.  The stock dropped by more than half from peak to trough.  Since bottoming in April, the stock has recovered by almost 30%.  Now it’s hovering around the $16 level.


Compared to other larger competitors, the company is trading at a nice discount.

Take sales for example.  Diageo posted revenue of just over $14 billion and they have a price/sales (P/S) ratio of 2.8x.  Another major competitor, Brown-Forman (BF-B), posted revenue of $2.4 billion.  Now their P/S ratio is 3.4x.

Then there’s Constellation.

They posted $3.3 billion of sales, yet their P/S ratio is an anemic 1.0x. Essentially you can buy this stock at a huge discount when compared to Diageo or Brown.

But sales aren’t the only thing I looked at.  Earnings are important too. Right now, Constellation has a P/E ratio of only 9x.  Diageo trades at a P/E of 13x and Brown 17x.

Once again, Constellation is trading at a 44% discount to Diageo and a stunning 88% discount to Brown!

This is a no brainer to me.  On Friday, April 9th, the company will be reporting earnings.  As long as they don’t blow up and management is somewhat positive, I think you could see this stock run significantly higher!

If you don’t mind taking on a little risk, consider buying the stock before earnings… you could get a good pop.  Conservative investors might wait till earnings are announced and establish a position then.

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