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Diageo plc (ADR) (DEO), Brown-Forman Corporation (BF.B): Celebrate Cinco de Mayo With These Stocks

Happy Cinco de Mayo! There’s perhaps no better time than now to review the market’s sin stocks that capitalize on our thirst for adult beverages. Sin stocks, companies whose product offerings are considered bad for our health, often suffer scrutiny from more socially conscious investors.

However, for investors fixated on finding the most profitable opportunities, the alcohol industry offers some extremely well-known businesses backed up by powerful brands. Here are four publicly traded sin stocks worthy of further research.

Diageo plc (ADR) (NYSE:DEO)

Industry heavyweights with stables of powerful brands

While Diageo plc (ADR) (NYSE:DEO) and Brown-Forman Corporation (NYSE:BF.B) might not be instantly recognizable, it’s likely that many investors came across one (or more) of their brands while stocking up for Cinco de Mayo festivities. That’s because these companies offer some of the most widely consumed liquor brands in existence.

Diageo plc (ADR) (NYSE:DEO) manufactures Jose Cuervo tequila, as well as Crown Royal and Bushmills whiskey. This is in addition to its other highly popular products, which include Johnnie Walker, Smirnoff, Captain Morgan, and Tanqueray.

Brown-Forman Corporation (NYSE:BF.B), meanwhile, produces the juggernaut Jack Daniels brand, as well as Southern Comfort.

As an alternative to whiskey and tequila, Molson Coors Brewing Company (NYSE:TAP) and Anheuser-Busch InBev NV (ADR) (NYSE:BUD) are titans of the beer industry.

Going where the growth is

Diageo plc (ADR) (NYSE:DEO) is firing on all cylinders. The $77 billion, U.K.-based company realized 8% sales growth and nearly 22% operating profit growth in 2012 — very impressive numbers in an industry scrambling for new growth opportunities.

Brown-Forman Corporation (NYSE:BF.B) has also reported solid growth recently. The company realized 9% growth in fiscal 2012 sales and operating income, and rewarded its shareholders in turn. Not too long ago, Brown-Forman Corporation (NYSE:BF.B) provided investors with a 9.5% dividend increase.

The beer market, meanwhile, is in a different situation, struggling with saturated markets. The U.S. alcohol market is extremely mature. Growth in consumption of alcohol has leveled off in the U.S.

For instance, Molson Coors Brewing Company (NYSE:TAP) reported that its beer volumes fell 0.5% in the United States, its largest geographical segment, in 2012. To combat this, the company made emerging market expansion a high priority.

Molson Coors Brewing Company (NYSE:TAP) first broke into the emerging markets with its $3.4 billion acquisition of Central and East European brewer StarBev last year. Until then, the United States made up more than 68% of Molson Coors Brewing Company (NYSE:TAP)’ total sales, and the company’s international operations were limited to Canada and the United Kingdom. By acquiring StarBev, the company will boost its portfolio of brands and grant it access to faster-developing economies.

Meanwhile, Anheuser-Busch InBev NV (ADR) (NYSE:BUD) experienced similar volume troubles last year. Anheuser-Busch InBev NV (ADR) (NYSE:BUD) grew its global volumes by only one percent in 2012, mainly because North America still accounts for 31% of its total volumes. As a result, the company has expanded its geographical horizons. Last year the company acquired the remaining portion of Groupo Modelo, maker of Corona, that it did not already own for $20.1 billion.

Anheuser-Busch InBev NV (ADR) (NYSE:BUD) has now amassed a portfolio of approximately 200 beer brands, including Stella Artois, Becks, and Michelob, in addition to Budweiser and Corona. The newly-formed beer giant now operates in 24 countries and employs 190,000 people worldwide.

Valuations that aren’t for the faint of heart

While Diageo plc (ADR) (NYSE:DEO), Brown-Forman Corporation (NYSE:BF.B), Molson Coors Brewing Company (NYSE:TAP), and Anheuser-Busch InBev NV (ADR) (NYSE:BUD) are highly profitable stocks that provide suitable dividend income to investors, it’s worth noting that they likely won’t attract the strictest value investors.

Each of these four stocks trades for trailing price-to-earnings ratios that are either nearing or have surpassed 20 times. These stocks trade for more expensive multiples than the broader market:  the S&P 500 Index is currently valued for approximately 18 times trailing earnings.

That being said, each of these stocks represents a high-quality business associated with extremely high barriers to entry. Should the potential for emerging market growth materialize to a significant degree, even their current lofty valuations may prove to be bargains. Value investors looking for a more measurable margin of safety may want to wait for pullbacks, but should these stocks drop, say, 10% from their current levels, investors would be wise to pounce. In the meantime, enjoy their products this Cinco de Mayo.

The article Celebrate Cinco de Mayo With These Stocks originally appeared on is written by Robert Ciura.

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