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Published: October 6, 2010
Here's the thing about sin: though ugly, it
tends to roll on in any
economy.
This fact is a huge benefit to companies that deal in vice. When
searching for investments in a slow-growth or uncertain economy,
investors often look to defensive industries such as healthcare,
food and utilities. After all, people still get sick and need to
eat and stay warm regardless of the state of the economy.
But, it's seldom mentioned that people consistently do something
else in any economy -- drink and smoke. In fact, vice just might
be the most defensive business of all.
Stocks in the cigarette and beer industries seem to keep on
making profits and the stocks keep going up regardless of what
the market is doing. While the S&P 500 is lower now than it was
10 years ago, Morningstar's cigarette industry category soared
at a remarkable average of more than +21% a year for the past 10
years. The Beverage-Brewer (beer) category returned an average
of about +16% per year for the same period.
And the outperformance is continuing.
Stocks of cigarette companies are up +24% so far this year and
the beer stocks are up a lofty +41% on average, compared to less
than +4% for the S&P 500.
While the recovery sputters in an environment even the Federal
Reserve calls "unusually uncertain", investors (without a moral
objection) might find a profitable port in the storm from the
world of vice.
Bad Boys worth a look
Phillip Morris International (NYSE: PM) is the second
largest tobacco company in the world (next to China National
Tobacco, which has a near monopoly). The cigarette giant owns
seven of the world's 15 leading brands, including the iconic
Marlboro brand, Parliament, Lark, Chesterfield and others.
Operating in 160 countries, Phillip Morris International has a
whopping industry-leading 15.4%
market share of the international market outside the United
States, and 26% not including China.
Phillip Morris International is the international division spun
off by Altria (NYSE: MO) in 2008. The spin off freed the
company from a host of legal and regulatory hurdles that face
Altria, while capturing the growth in international markets. The
company generated 42% of first half 2010 revenue in fast growing
emerging markets, and has a huge 30% average market share in the
top 10 emerging market countries excluding China.
Although highly defensive, the cigarette
industry is not immune to economic conditions as smokers quit or
buy cheaper brands in a soft economy. The company estimates
worldwide cigarette volume will decrease about -2% in 2010. But,
the company estimates its own sales volume to increase about +3%
to +4% for the year because of exposure to emerging markets.
Phillip Morris International is an absolute cash cow that
generates
free cash flow of 30% of net revenue (a figure among the
highest for large multinational companies). The company just
increased the quarterly
dividend +7.4% and the stock now pays a solid 4.6%
yield.
Boston Beer Company (NYSE: SAM) is the fourth largest
brewer in the United States and the largest domestic producer of
craft beer with its flagship Sam Adams brand. Craft beer is
differentiated from mass produced beer in that it is defined as
any beer that sells less than two million barrels per year. Beer
drinkers are increasingly choosing the more unique and rich
taste of craft beer.
Craft beer has been the fastest growing category in alcoholic
beverages. While liquor and mainstream beer sales fell during
the recession, craft beer sales increased +6% in 2008 and +5% in
2009. In the first half of 2010, craft beer sales have increased
+9% from last year, compared to a year-over-year decrease for
mainstream beer sales of -2.7%.
Boston Beer has plenty of room to grow. While
net income more than doubled between 2005 and 2009, the
company is still relatively small with 2009 revenue of just $415
million. Boston Beer is well-positioned financially, as it has
(as of June 30th) $54 million in cash and no debt.
The stock has soared +80% during the past year and +43% year to
date, but it still sells at just under 24 times
earnings, which is lower than the beer category average and
lower than its average multiple for the past five years.
Action to Take --> Both
Phillip Morris International and Boston Beer should continue to
generate strong earnings in either a good economy or a bad
economy. The resilience of these companies makes them ideal
investments in today's environment. Both stocks can be purchased
at current prices.
-- Tom Hutchinson
Staff Writer
StreetAuthority |
