Date: February Analyst Name: Mallary Dana CIF Stock Recommendation Report (Spring 2013) Company Name and Ticker: BEAM Section (A) Summary Recommendation Buy: Yes No Target Price: Stop Loss Price: Sector: Consumer Staples Current Price: 60.87 Morningstar (MS) Fair Value Est.: 55.00 EPS (TTM): 2.38 Next Fiscal Yr. End Year : Month : 2013 December Forward P/E: 20.2 % Inst. Ownership: 78.47 Industry: Beverages wineries & distilleries 52 WK Hi: 64.00 MS FV Uncertainty: High EPS (FY1): 2.64 Last Fiscal Qtr. End: Less Than 8 WK: Y N Mean LT Growth: 11.73 Inst. Ownership Net Buy: Y N Market Cap (in Billions): 9.8 billion 52 WK Low: 52.69 MS Consider Buying: 33.00 EPS (FY2): 2.92 If Less Than 8 WK, next Earnings Ann. Date: PEG: 1.6 Short Interest Ratio: 0.8 # of Shrs. O/S (in Millions): 160.33 EBO Valuation: 22.41 MS Consider Selling: 85.25 MS Star Rating: 3 stars Ratio Analysis Company Industry Sector P/E (TTM) 24.67 29.81 27.15 P/S (TTM) 3.97 5.98 3.12 P/B (MRQ) 2.11 1.25 2.59 P/CF (TTM) 18.93 30.03 18.89 Dividend Yield 1.47 0.71 1.70 Total Debt/Equity (MRQ) 54.31 21.13 29.55 Net Profit Margin (TTM) 15.15 16.77 7.32 ROA (TTM) 4.94 2.10 4.33 ROE (TTM) 9.14 6.25 9.63 Analyst Consensus Recommendation: Hold Beta: 1.5 Short as % of Float: 0.50% 1
Investment Thesis I think that Beam Inc. is a great stock. They showed a lot of growth in the past year. They are competing in an industry that has high brand loyalty making the stock more recession proof. Beam has been able to convert most all of their profits into cash which will continue to increase shareholder value by acquisitions, buying back shares and investing for growth. Their ratios look pretty good compared to their competitors and they have been given positive estimates from analysts. They have a high LT growth rate of 11.73% and a low P/B ratio. Some downsides of the stock are that it lacks in the depth of brands that their rivals have. Also because they are a premium spirits company, if consumers were to switch to lower priced products their sales could take a hit. Another down side of the stock is that the stock price is getting pretty close to their 52 week high of 64.00. Which leads me to my recommendation to not buy. I think that we may have missed the chance to gain a profit. One of their competitors may be a better stock to look into. Summary Provide brief summary of your analysis in each section that follows Company Profile: Beam Inc. is in the beverageswineries and distilleries industry. They are a premium spirits company that makes and sells their products worldwide. Fundamental Valuation: For my fundamental valuation I picked a five year abnormal growth period. I think that the company will be able to continue growth for the next five years with the current rate. Relative Valuation: Diago PLC, Brown Forman Corp, and Constellation Brands Inc. are the closest competitors. When comparing ratios with their competitors Beam is right in the middle with their P/S and P/CF ratios. They have the lowest P/B ratio and have a low ROE (5 yr avg). They also have a higher mean LT growth rate. Revenue and Earnings Estimates: Revenue and Earnings estimates look good. Both are expected to increase throughout this year and next. Analyst Recommendations: Beam received a 3 star rating from morning star. Analysts recommend to hold the stock. Bulls say that Beam has a strong brand portfolio and their ability to convert 90% of profits into cash allows the firm to continue increasing shareholder value. Bears say Beams portfolio lacks the depth of larger rivals and consumers may decide to pick lower priced products. Institutional Ownership: Not enough information given Short Interest: Short interest is quite low. It has not been fluctuating a lot, but has been decreasing since December of last year leading me to believe that people are not expecting the stock price to drop 2
Stock Price Chart: The three month stock price chart shows that Beams stock price has been growing more then their competitors, the sector, and the S&P 500. The 1 year chart shows that Beam is keeping up with the S&P and the sector well but their competitors stocks are outperforming them. The 5 year stock price chart shows that Beam is really behind their competitors, the S&P and the sector. Section (B) Company Profile (two pages maximum) Company Summary Beam Inc. was incorporated in 1985 and is now the fourth largest global spirits firm. They are a premium spirits company that makes and sells their products in a worldwide market. They own 10 of the top 100 global premium spirits brands. Their main products include bourbon, scotch, Canadian whiskey, tequila, cognac, rum, cordials, and premixed cocktails. They are made up of three geographic segments including United States, Canada, and Mexico; Europe, Middle East, and Africa (EMEA); And Asian Pacific and South America (APSA). The North America Segments brought in 56.14 % of revenues, the EMEA segment brought in 22.34%, and the APSA segment brought in 21.52% of revenues. In 2011 they acquired Skinnygirl cocktail business. And in 2012 the company acquired Cooley Distillery. They also acquired Pinnacle Vodka and Calico Jack rum brands from White Rock Distilleries. Business Model, Competition, Environment and Strategy Beam Inc. is one of the worlds leading premium spirits company by focusing on impactful marketing, innovation, and entrepreneurial spirit. They strive to enhance shareholder value by building their core distilled spirits brand to drive sales and earning growth and enhance returns on a long term basis. They are pushing their brands to outperform respective markets by creating famous brands, building winning markets, and fueling growth. Instead of focusing on a low cost product they want to gain customer loyalty with a product quality, brand image, and innovation. Their main competitors are Diageo PLC, Brown Forman Corporation, Constellation Brands Inc., and Pernod Ricard. They all have very similar business strategies in that they all focus on gaining customer loyalty through providing a high quality brand. Some of the bigger risk factors are current global economic challenges, changes in consumer preferences and trends, competition, commodity price volatility, and currency fluctuation. The 3
first risk factor, which affects many more companies than just Beam Inc. are effects of global and economic challenges. The weak economy could result in decreased operations, cash flows and the financial condition of the company. Changes in consumer preferences are another risk that affects Beam Inc. more directly. Demand for spirits may be affected by many factors including changes in consumer preferences and trends. Changes in preferences and trends and depend on many factors including changes in social trends, product innovations, economic downturn, and etc. Risks are also associated with competition through out the industry. Competitors may either find better ways of innovation or respond to changing consumer needs faster. Even though Beam Inc. concentrates on customer loyalty, any prices changes either Beam makes or their competitors make can change consumer preferences. The risk of price volatility can affect product prices. Beam Inc. depends on corn and other grains, molasses, grapes, glass and plastic for the production, packaging and distribution of our products and grow agave plants for tequila production. Events such as extreme weather conditions can destroy crops, which would raise costs on resources. Weather conditions can also affect transportation of products causing transportation costs to rise. One of the biggest risks associated with price volatility is extreme weather. The last major risk factor is currency fluctuation. Because Beam Inc. manufactures, source and sells product internationally changes in currency can impact financial statements when converting back to U.S. dollars. 4
Revenue and Earnings History Annual Revenue and Earnings Revenue Earnings 2011 2311.10 0.83308 2012 2465.9 2.4741 For both 2011 and 2012 revenues are lower at the beginning of the year and continually increase till the end of the year. Revenues are the highest in the third quarter. Earnings are a little different and do not really show a certain pattern. Though in 2011 there was a significant decrease in the third quarter. During 2012 revenue has grown continually. This may be due to the fact the last year was the first full year that Beam Inc. focused on spirits only. Because of this Beam Inc. further strengthen their brand name with impactful marketing and advertising. 5
Section (C) Fundamental Valuation (EBO) Inputs (provide below input values used in your analysis) EPS forecasts (FY1 & FY2): _2.64 & 2.92 Long term growth rate: _11.73% Book value /share (along with book value and number of shares outstanding): Book value: 4612.10 # of shares outstanding: 159.11 Book value / share: 28.98 Dividend payout ratio: 32.66% Next fiscal year end: 2013 Current fiscal month: 3 Target ROE: 4.99 Discount rate: Risk free rate: 2.77% Beta: 1.51 Market risk premium: 6.93 Output Above normal growth period chosen: 5 year EBO valuation (Implied price from the spreadsheet): $22.41 6
Sensitivity Analysis EBO valuation would be (you can include more than one scenario in each of the following): 21.92 if changing above normal growth period to 4 years 23.82 if changing growth rate from mean (consensus) to the highest estimate 13.0% 22.16 if changing growth rate from mean (consensus) to the lowest estimate 10.7% 19.29 if changing discount rate to 15.0% 22.41 if changing target ROE to 8.0% The discount rate that I used is 13.23 but using a beta of 1.51, the 20 year t bill rate of 2.77, and the expected return I use was 9.5%. I pick a 5 year abnormal growth period because they have recently acquired other companies and I think that this is a reasonable period of time for them to start seeing profits from it. 7
Section (D) Relative Valuation From the top panel I chose Diago PLC, Brown Forman Corp, Constellation Brands Inc. and Anheuser Busch because they were the four companies that were most related to Beam Inc. when it comes to the industry and the types of products they provide. Diago PLC does business around the world and they specialize in spirits, beer, wine, and ready to drink. Like Beam they focus on customer loyalty with their high quality products. Brown Forman Corp. manufactures, bottles, imports, exports, and markets a range of alcoholic beverage brands. Constellations Brands Inc. like the other companies specializes in high quality spirits. The only big difference between Contellation Brands Inc. and the other competitors is that they do not do as much business around the world. I could not find any other competitors that would give realistic multiples to compare Beam with. I have Anheuser Busch on the relative valuation template, but I do not think that it is comparable with the other three companies because they are a company that specialized in beer only unlike the other companies that have spirits, wine, beer and ready to drink products. Beam Inc. and their competitors have pretty different multiples. Diago PLC has higher multiples than the other companies except for their price to cash flow. Beam Inc. stands mostly in the middle of their competitors except for their mean long term growth rate, which is second to highest behind Brown Forman Corp. Their price to book and ROE ratios are on the lower end compared to their competitors. Beam and their competitors all have PEG ratios above 1 leading me to believe that they are over valued. Their Forward P/E ratio is greater than most of their competitors leading me to believe that their earnings going forward might not be as good. Their estimated P/E ratio is also less than their current P/E, the industries P/E, and the sectors P/E ratios also leading me to believe that earnings are expected to grow. 8
Section (E) Revenue and Earnings Estimates For sales, estimates were all lower than the actual sales with the exception of December 2011. Earnings estimates were all lower than actual earnings. The biggest surprises for both sales and earnings where in March and September of 2012, which was when there was the biggest difference in estimated and actual numbers. All of the surprises are positive 9
Sales High Low Quarter Ending March 13 3.68% 1.83% Quarter Ending Jun 13 3.43% 3.39% Year Ending Dec 13 1.46% 0.97% Year Ending Dec 14 2.74% 1.78% Earnings Quarter Ending March 13 3.70% 5.56% Quarter Ending Jun 13 3.13% 4.69% Year Ending Dec 13 1.14% 1.14% Year Ending Dec 14 2.74% 3.77% The differences between the mean estimate and the high and low estimate are more notable for earnings for year ending 2014. There are many more analysts providing revenue and earnings estimates than LT growth rate estimates. 10
Estimate trends have been consistently trending upwards except for quarter ending June 2013 for Sales. Sales decreased from 652.90 to 644.89. The estimates for earnings stay more consistent than the estimates for sales. 11
During the last week there have been no revisions but in the last four weeks there have definitely been more down revisions than up revisions. There have also been more down revisions for earnings than for sales. 12
Section (F) Analysts Recommendations During the past three months there really has not been much change in analysts revisions. No one has recommended selling the stock but most analysts say to hold the stock. Ratings have stayed between the 2.5 and 2.6 ranges through out the last three months, but ratings have gone down from 2.57 three months ago to 2.5 currently. The only notable changes are that ratings have gone down but that is due to the fact that there are currently less analysts. I thought that it was interesting that there were not more analysts recommending buying the stock after reading the Morning Star analyst research report. Analysts seemed to be quite bullish on the stock and seemed optimistic about future growth. Section (G) Institutional Ownership Copy/paste the completed CIF Institutional Ownership spreadsheet here. There was not enough information provided to finish this spreadsheet 13
Section (H) Short Interest (two pages) 14
Complete the following table with information from the share statistics table. Avg Vol Avg Vol Shares (3 month) (10 day) Outstanding Float 909,305 787,200 159.40M 138.14M Shares Short Short Ratio Short % of Float Shares Short (Most recent date) (Most recent date) (Most recent date) (2 weeks prior) 679.57K 1.00 0.50% 730.55K Short interest for Beam in is quite low. It has not been fluctuating very much especially since the beginning of the year. It has been decreasing since December of last year leading me to believe that people are not expecting the stock price to drop. These are also sign that sentiment has turned more bullish especially since the end of last year. Beams short interest compared to their competitors seem pretty similar. They do have the lowest average days to cover, though currently they have the highest short interest ratio of 0.756. In the past couple months all three companies have had only one days to cover, and short interest ratios below one. However, before the first of the year all three companies consistently had short interest ratios above one. The decrease in short interest ratio shows signs of bullish sentiment. 15
Diago PLC Short Interest 16
Anheuser Busch 17
Section (I) Stock Charts A three months price chart A one year price chart 18
A five year price chart Moving Average and Relative Strength 6 months 19
2 Years 20
Discuss what you observe from the stock charts. This should include comparing your stock to competitors, sector, and SP500 over the three different time horizons. 21