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Assessment of Beam as investment opportunity with or without Diageo takeover materializing

Source: Wall Street Journal

Jim Beam’s BEAM +0.96% in high spirits. And not just on bid talk.

Shares in Beam, which owns the famous Kentucky bourbon, are up just over 40% since its creation via the breakup of Fortune Brands in October 2011. Bulls are looking to push that higher, betting Diageo DGE.LN -0.16% could sharpen its taste for a deal after it failed to agree to a takeover of tequila maker Jose Cuervo in December.

But even if a bid for Beam doesn’t materialize, there are other reasons to own the shares.

Beam is the second-largest spirits distiller in the U.S. by revenue, with an 11% share based on Nielsen data. And Beam is knee-deep in bourbon, which is the fastest-expanding major spirit in the U.S., with volumes gaining on rum. That underpins its 7% revenue growth in the first 11 months of 2012, more than double the spirits market’s growth.

Bourbon should stay in the sweet spot as flavored variants bring in new drinkers and more consumers trade up to premium brands like Beam’s Maker’s Mark. And after years of underinvestment, Beam is spending more on advertising on a per-case basis than the industry’s average, helping to boost market share while still increasing earnings by a forecast 10% based on FactSet consensus estimates.

But Beam isn’t just about bourbon. Its shares are a play on the improving health of the U.S. spirits market. Pricing is returning to precrisis levels, with Beam, Diageo and others raising them by 2% to 3% on average in 2012. And the company, which is due to report fourth-quarter earnings this coming week, also raised its annual dividend 10% on Friday.

Then there is the hope for a takeover bid. If Diageo, which has 28% of the market, were to buy Beam, it would cement its control of U.S. spirits for decades.

One question: Is Beam too expensive to be taken over? Beam’s valuation at 14.5 times forecast 2013 enterprise value to earnings before interest, taxes, depreciation and amortization doesn’t look unreasonable next to its closest peer, Jack Daniel’s distiller Brown-Forman, BFB +0.96% at 13.9 times.

Taking a standard 30% premium boosts Beam’s multiple to 18.3 times, close to the price Pernod Ricard RI.FR +0.36% paid for Vin & Sprit in 2008. The complexity is how to balance the premium with the price and capital-gains tax on brands that competition authorities would likely force a buyer to sell. For Diageo, that could mean shedding brands that account for just over half of Beam’s earnings before interest, taxes, depreciation and amortization, estimates Morgan Stanley MS +0.44% .

So clearly there are hurdles to a bid. Even without one, though, Beam could be a tipple worth sampling.
Source: Wall Street Journal
By: Renee Schultes