Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Whiskey and Cigarettes: The Best Way to Profit From Sin Stocks

Companies / Investing 2012 Feb 13, 2012 - 06:49 AM GMT

By: Money_Morning

Companies

Best Financial Markets Analysis ArticleJason Simpkins writes: The common misconception is that so-called "sin stocks" only perform well when the economy tanks.

But the truth is that purveyors of alcohol and tobacco take their lumps during a recession just like everybody else.


That was certainly true of the world's largest spirits company Diageo PLC (NYSE: DEO), which traded as low as $42 a share in 2008. Of course, the stock has more than doubled since then, closing Friday at $93.38.

Shares of cigarette-maker Philip Morris International Inc. (NYSE: PM) have nearly doubled in the past two years, as well.

Still, you don't have to worry if you missed either of those rallies because there's still plenty of room for these two sin stocks to run.

Indeed, more and more consumers are returning to their vices as the global economy improves.

For instance, liquor sales, which stagnated in 2009, rose 4% last year, while sales of top shelf spirits increased 5.3% -- a near return to pre-2008 levels.

What's more is that these gains came at the expense of the beer market, which typically has the upper hand in tough economic times.

"People who are doing well are going out and spending on spirits as an affordable luxury," John McDonnell, chief operating officer for The Patron Spirits Co. and chairman-elect of the Spirits Council, told Bloomberg. "Also, spirits companies never stopped spending through the downturn."

The same goes for tobacco products, which have been gathering steam in emerging markets even while they fall out of fashion in developed countries like the United States.

So let's take a closer look.

Diageo is Uplifting Spirits
Diageo - the company behind Baileys, Captain Morgan, Guinness, Smirnoff, and Johnnie Walker - is the most obvious beneficiary of increased liquor sales.

These are powerful brands that helped Diageo actually increase its cash flow during the recession. And now that consumers worldwide are in a slightly more festive mood, sales are set to take off.

Diageo, which produces about 28% of the spirits sold in the United States, reported a 5% increase in liquor sales in the U.S. and Canada in the second half of 2011.

More importantly, the company continued to expand its business in emerging markets.

While volumes were flat in North America and Europe, Diageo generated 14% volume growth in Latin America, 7% in Africa, and 5% in the Asia-Pacific region.

And that's just the beginning for a company that has made developing markets the focus of its growth strategy.

Diageo increased its marketing spending by 10% to 15.8% of sales in the second half of 2011. And nearly 75% of that increased spending was devoted to emerging markets.

Additionally, the company has taken steps to increase its beer business in the fledgling African market by making some shrewd acquisitions.

In November, Diageo invested $211 million (134 million pounds) for a 20% stake in SABMiller's (PINK: SBMRY) Kenya Breweries. And just last month, the company acquired Meta Abo Brewery in Ethiopia for $228 million (145 million pounds).

Diageo believes Ethiopia's beer market will grow more than 10% annually through 2015. And with its takeover of Meta, the company will command 50% of that market.

This growth potential has clearly been factored into Diageo's share price which is up more than 6% over the past month and 22% in the past year.

The stock is currently trading at roughly 17-times fiscal 2012 earnings and yields nearly 3%.

Phillip Morris Smokes the Competition
Liquor companies like Diageo aren't the only ones toasting success these days, either.

Cigarette companies like Philip Morris, Reynolds American Inc. (NYSE: RAI), and Lorillard Inc. (NYSE: LO) have been posting some impressive numbers, as well.

Reynolds, the nation's second-biggest tobacco company, just reported a 16% jump in fourth-quarter profit. And Lorillard, which dominates the market for menthol cigarettes, saw its fourth-quarter profit surge 20%.

Still, tax hikes, smoking bans, health concerns, and social stigma will continue to make life difficult for these companies - especially in the United States.

For that reason Philip Morris International (PMI) may be the best bet for investors.

True to its name PMI has a strong global presence, particularly in Asia. The company said its shipments grew less than 1% to 226.6 billion cigarettes in the fourth quarter, only because a 10.5% in Asia offset declines of about 7% in Europe, Latin America, and Canada.

PMI bolstered its Pacific Rim presence in February 2010 by buying the Philippines' Fortune Tobacco Co. That merger gave PMI 90% of the Filipino market. Meanwhile, the company has broadened its market share in Korea and Indonesia to about 20% and 30% respectively.

In total, PMI holds a 27.6% share of the cigarette market outside of the U.S. and China, with a brand portfolio that includes 15 of the top international brands, including Marlboro.

The company earned $8.59 billion, or $4.85 per share, in 2011 compared with $7.26 billion, or $3.92 per share, in 2010. Revenue excluding excise taxes increased about 14% to $31.1 billion. Its shipments were up nearly 2% to 915.3 billion cigarettes.

Better still, the company's share price has been bolstered by share buybacks and dividend increases.

In fiscal 2011, PMI spent $5.4 billion to repurchase 80.5 million shares of its own common stock. The company plans share repurchases of approximately $6 billion in fiscal 2012.

PMI also has a strong history of dividend increases.

The company hiked its dividend by 20.3% last year to $0.77, representing an annualized rate of $3.08 per common share. There's a good chance the payout will be raised again this year, as well.

So when it comes to sin stocks Philip Morris International and Diageo clearly have an edge over the competition.

Source http://moneymorning.com/2012/02/13/worlds-t...

Money Morning/The Money Map Report

©2012 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive



© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in