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The Bourbon Boom: Is It Investable?

August 22, 2014 | About:

Bourbon whiskey lovers rejoice: Production of your poison of choice has risen to levels last seen in the 1970s.

For whiskey to legally meet the definition of “straight bourbon,” it must be aged a minimum of two years in new charred oak barrels, and many of the high-end, small-batch bourbons so popular with the hipster crowd are aged significantly longer. For example, Maker’s Mark — one of Suntory’s (STBFY) higher-end brands — is usually aged about six years.This is definitely good news for bourbon drinkers. As recently as this past May, I reported news that I found to be deeply disturbing: we are drinking bourbon faster than the distillers can make it. And because bourbon — unlike, say, vodka or gin — has aging requirements, shortages cannot be immediately met by ramping up production.

So, a ramping up of production today is essentially a bet that today’s high demand for “traditional” spirits like bourbon is a sustainable trend and not merely a passing fancy of fashionable drinkers. Only time will tell whether this proves to be true, but we’ve seen drinks juggernaut Diageo (DEO) make a similar bet on scotch in recent years. In 2012, Diageo embarked on major five-year expansion plan, plowing $1.5 billion into new production facilities in Scotland.

And the aging period for scotch is significantly longer than that of bourbon; Diageo’s Johnnie Walker Black Label — a respectable though certainly not spectacular brand — has a minimum aging requirement of 12 years. (Diageo, by the way, has also jumped into the bourbon race with its heavily promoted Bulleit Bourbon.)

My bet is that the bourbon boom has longer to run. If you recall, the boom in vodka popularity steadily gained ground throughout the 1990s and 2000s, reaching its climax with the success of ultra-premium brands like Ketel One and Ciroc. If the past is any guide, the bourbon renaissance is still in the early stages.

The question is, is there any way to profit from it?

The Bourbon Boom

If you’ve ever dreamed of turning a moonshine still into a respectable business, this would certainly be the time. Just as microbreweries have become popular eating and drinking establishments, so have microdistilleries. And contrary to popular belief, you don’t have to distill your product in the state of Kentucky in order to legally call it bourbon; anywhere in the United States will suffice.

Of course, most of us lack the time, patience, and backwoods credentials to distill our own bourbon. And unfortunately, there aren’t too many pure bourbon plays left among alcohol stocks.

The two biggest alcohol stocks for bourbon — Diageo and Suntory — are massive multinational spirits companies, and bourbon makes up a relatively small part of their drinks portfolio. Suntory is the owner of the iconic Jim Beam brand, as well as Maker’s Mark, Knob Creek and even the stodgy Old Crow. But collectively, all of Suntory’s bourbon brands make up less than 10% of Suntory’s current revenues. And Diageo’s exposure to bourbon is so small as to be almost nonexistent.

What about indirect investments, such as in barrel makers (or “coopers” for the English majors out there)? Unfortunately, most coopers are relatively small and are privately held.

Are There Any Alcohol Stocks Worth Buying?

So, what alcohol stocks are we left with?

At the risk of offending purists, the closest thing to a pure play on “bourbon” would be Brown-Forman Company (BF.B), the maker of the iconic Jack Daniels Tennessee Whiskey.

I should be clear: Jack Daniels is not bourbon. It’s Tennessee Whiskey. But for most drinkers, bourbon and Tennessee Whiskey are close enough to be interchangeable, and Tennessee whiskey has enjoyed a healthy boom alongside bourbon over the past decade.

Alas, Brown-Forman is a very expensive stock at today’s prices, trading hands at more than 30 times trailing earnings and 25 times expected forward earnings.

That’s too expensive for my tastes. At, say, 20-22 times earnings, I would consider Brown-Forman attractive. But at today’s prices, your money might be better spent on its whiskey rather than its stock.

About the author:

Charles Sizemore
Charles Lewis Sizemore, CFA is the Chief Investment Officer of Sizemore Capital Management. Please contact our offices today for a portfolio consultation.

Mr. Sizemore has been a repeat guest on Fox Business News, has been quoted in Barron’s Magazine and the Wall Street Journal, and has been published in many respected financial websites, including MarketWatch, TheStreet.com, InvestorPlace, MSN Money, Seeking Alpha, Stocks, Futures, and Options Magazine and The Daily Reckoning.

Visit Charles Sizemore's Website


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