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Get Four
|  | DECEMBER 21, 2005
 INDUSTRY IN FOCUS By Anishka Clarke A Toast to Some Top-Shelf TipplesSpirits and wine outfits have plenty of reasons to expect strong growth, with Constellation Brands' prospects brighter than mostStandard & Poor's has a positive fundamental outlook on the group, part of the consumer-staples sector. However, prospects differ among the individual segments that make up the alcoholic-beverages group. We expect the growth rates of distiller and vintner companies to continue to outpace that of their beer counterparts for at least the next 12 months, fueled by favorable demographic trends, aggressive marketing for both the home consumption and bar/restaurant markets, product innovation, and the continuation of "trading-up" trends -- especially for imported brands. We see U.S. distilled-spirits volumes rising in the mid-single-digit range in 2005 and beyond, following a 4.1% rise in 2004, on continued innovations and aggressive on-premise marketing to first-time drinkers and the over-50 age group. Similarly, we see vintners' volumes rising in the high single digits, after a 3.4% gain in 2004, driven by increased off-premise consumption. TOP SHELF. We think aggressive marketing and innovations by spirits and wine companies, including Constellation Brands (STZ ) -- our favorite name in the group -- Brown-Forman (BF.B ), and Diageo (DEO ), will continue to restrain beer growth, which was flat in 2004, particularly in the primary target demographic, the 21-and-over age group, or first-time drinkers. In the near term, we are less optimistic of a recovery in beer volumes, despite more aggressive marketing and new product introductions from brewers. We look for consumers to continue to trade up to luxury items in 2005 and beyond. Accordingly, we believe consumption trends for wine and spirits, primarily in the premium and above categories, likely will continue to benefit from trading-up activity, due to higher disposable incomes. SHRINKING SUDS. Over the last several years, many consumers of alcoholic beverages have traded in their popular and premium brands of choice for the more expensive super-premium names. This phenomenon is most apparent in the on-premise trade. For status or health reasons, drinkers have flocked to the super-premiums and imported brands. Also, we believe consumers will dine out more, contributing to growth in wine and spirits sales. While beer historically has been the alcoholic beverage of choice for the first-time drinker, we have seen a surge in the consumption of spirits and wines by this group in the past couple of years, due to demographic changes and lots of marketing. The number of consumers reaching legal age has risen steadily in recent years, according to the U.S. Census Bureau. In 1999, the 21- to 24-year-old age group began increasing in size for the first time in two decades. This growth is expected to continue through 2010. Interestingly, in the most recent Gallup Poll, conducted in July, 2005, wine edged out beer as the preferred beverage for the first time in the history of the survey. Thirty-nine percent of the persons polled preferred wine, compared with 36% for beer. This follows on the 2004 poll, which showed that 24% of consumers drank spirits most often, up from 20% in 1996. NEW LINES. We believe premium-wine sales should also benefit from increasing numbers of consumers in the over-55 age group, who tend to consume more wine (especially premium and above wine) and spirits than beer. As this demographic approaches retirement age, we anticipate an increase in their leisure activity. We see retirees seeking more dining-out occasions, greater travel opportunities, and additional entertainment activities, all of which bode well for increased alcohol consumption, in our view. Also, we attribute increasing wine and spirits consumption to aggressive marketing to favored demographic groups by companies focused on new products, line extensions, and the claims that these products are healthier than beer. While we believe growth rates will fall for most categories of beer in 2005, including light beers, we expect momentum in imports to build on the 3% rise in 2004, as new products enter the category. We see mid- to high-single-digit growth for beer in 2005, with a slight slowdown in 2006, benefiting from the narrowing of price gaps between some premium domestics and continued trading-up activity. CHANGING TASTES. The imported-beer category has experienced annual growth mostly in the double digits in the last decade, significantly outpacing the overall domestic category, and steadily gaining market share to just below 12% at the end of 2004. Following a slowdown in 2004, imports are rising rapidly in 2005, led by major import Corona, which is distributed by Constellation. With innovation as the key driver, imports have seen a resurgence: Sales rose almost 7% for the first six months of 2005, led by the introduction of light beers. By comparison, domestic brewers, as a whole, saw sales decline by a little more than 2%. In our opinion, imports have benefited from several factors, primarily the trading-up phenomenon and, to a lesser extent, changing demographics. Why is Constellation Brands, ranked 5 STARS (buy), our favorite alcoholic-beverage stock recommendation? With our expectations for continued strength in the U.S. wine and spirits market and the imported-beer segment for the next 12 months, we look for sales to rise 16% in fiscal 2006, given its high exposure to wines and imported beer. In fiscal 2005, Constellation garnered more than 92% of its sales from wines and imported beer. CONSTELLATION SHINES. We also believe its broad product diversification increases Constellation's attractiveness in the U.S. and international markets; its geographic diversification minimizes its country risk exposure; and its distribution network effectively leverages its product portfolio. As a major distributor of the leading imported beer, as well as a leading wine producer, and given its focus on growing its spirits category, Constellation Brands is well positioned to take further advantage of growth momentum in the U.S. imported-beer, wine, and spirits categories, benefiting from strengthening demand in the first-time drinker and baby-boomer categories. Of the other alcoholic-beverage stocks named in this report, both Brown-Forman and Diageo are ranked 3 STARS (hold). Glossary S&P STARS: Since Jan. 1, 1987, Standard & Poor's Equity Research Services has ranked a universe of common stocks based on a given stock's potential for future performance. Under proprietary STARS (STock Appreciation Ranking System), S&P equity analysts rank stocks according to their individual forecast of a stock's future capital appreciation potential vs. the expected performance of a relevant benchmark (e.g., a regional index: S&P Asia 50 Index, S&P Europe 350 Index, or S&P 500 Index), based on a 12-month time horizon. STARS was designed to meet the needs of investors looking to put their investment decisions in perspective. S&P Earnings & Dividend Rank (also known as S&P Quality Rank): Growth and stability of earnings and dividends are deemed key elements in establishing S&P's earnings and dividend rankings for common stocks, which are designed to capsulize the nature of this record in a single symbol. It should be noted, however, that the process also takes into consideration certain adjustments and modifications deemed desirable in establishing such rankings. The final score for each stock is measured against a scoring matrix determined by analysis of the scores of a large and representative sample of stocks. The range of scores in the array of this sample has been aligned with the following ladder of rankings:
S&P Issuer Credit Rating: A Standard & Poor's Issuer Credit Rating is a current opinion of an obligor's overall financial capacity (its creditworthiness) to pay its financial obligations. This opinion focuses on the obligor's capacity and willingness to meet its financial commitments as they come due. It does not apply to any specific financial obligation, as it does not take into account the nature and provisions of the obligation, its standing in bankruptcy or liquidation, statutory preferences, or the legality and enforceability of the obligation. In addition, it does not take into account the creditworthiness of the guarantors, insurers, or other forms of credit enhancement on the obligation. The Issuer Credit Rating is not a recommendation to purchase, sell, or hold a financial obligation issued by an obligor, as it does not comment on market price or suitability for a particular investor. Issuer Credit Ratings are based on current information furnished by obligors or obtained by Standard & Poor's from other sources it considers reliable. Standard & Poor's does not perform an audit in connection with any Issuer Credit Rating and may, on occasion, rely on unaudited financial information. Issuer Credit Ratings may be changed, suspended, or withdrawn as a result of changes in, or unavailability of, such information, or based on other circumstances. S&P Core Earnings: Standard & Poor's Core Earnings is a uniform methodology for calculating operating earnings, and focuses on a company's after-tax earnings generated from its principal businesses. Included in the Standard & Poor's definition are employee stock-option grant expenses, pension costs, restructuring charges from ongoing operations, write-downs of depreciable or amortizable operating assets, purchased research and development, M&A-related expenses, and unrealized gains/losses from hedging activities. Excluded from the definition are pension gains, impairment of goodwill charges, gains or losses from asset sales, reversal of prior-year charges, and provision from litigation or insurance settlements. S&P 12-Month Target Price: The S&P equity analyst's projection of the market price a given security will command 12 months hence, based on a combination of intrinsic, relative, and private market valuation metrics. Standard & Poor's Equity Research Services: Standard & Poor's Equity Research Services U.S. includes Standard & Poor's Investment Advisory Services LLC; Standard & Poor's Equity Research Services Europe includes Standard & Poor's LLC- London and Standard & Poor's AB (Sweden); Standard & Poor's Equity Research Services Asia includes Standard & Poor's LLC's offices in Hong Kong, Singapore, and Tokyo. Required Disclosures In the U.S. As of Sept. 30, 2005, research analysts at Standard & Poor's Equity Research Services U.S. have recommended 28.7% of issuers with buy recommendations, 60.3% with hold recommendations, and 11.0% with sell recommendations. In Europe As of Sept. 30, 2005, research analysts at Standard & Poor's Equity Research Services Europe have recommended 34.8% of issuers with buy recommendations, 44.8% with hold recommendations, and 20.4% with sell recommendations. In Asia As of Sept. 30, 2005, research analysts at Standard & Poor's Equity Research Services Asia have recommended 28.1% of issuers with buy recommendations, 51.1% with hold recommendations, and 20.8% with sell recommendations. Globally As of Sept. 30, 2005, research analysts at Standard & Poor's Equity Research Services globally have recommended 29.3% of issuers with buy recommendations, 57.7% with hold recommendations and 13.0% with sell recommendations. 5-STARS (Strong Buy): Total return is expected to outperform the total return of a relevant benchmark by a wide margin over the coming 12 months, with shares rising in price on an absolute basis. 4-STARS (Buy): Total return is expected to outperform the total return of a relevant benchmark over the coming 12 months, with shares rising in price on an absolute basis. 3-STARS (Hold): Total return is expected to closely approximate the total return of a relevant benchmark over the coming 12 months, with shares generally rising in price on an absolute basis. 2-STARS (Sell): Total return is expected to underperform the total return of a relevant benchmark over the coming 12 months, and the share price is not anticipated to show a gain. 1-STARS (Strong Sell): Total return is expected to underperform the total return of a relevant benchmark by a wide margin over the coming 12 months, with shares falling in price on an absolute basis. Relevant benchmarks: in the U.S., the relevant benchmark is the S&P 500 Index; in Europe, the S&P Europe 350 Index; and in Asia, the S&P Asia 50 Index. For All Regions: All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. Additional information is available upon request to Standard & Poor's, 55 Water Street, NY, NY. Other Disclosures This report has been prepared and issued by Standard & Poor's and/or one of its affiliates. In the United States, research reports are prepared by Standard & Poor's Investment Advisory Services LLC ("SPIAS"). In the United States, research reports are issued by Standard & Poor's ("S&P"); in the United Kingdom, by Standard & Poor's LLC ("S&P LLC"), which is authorized and regulated by the Financial Services Authority; in Hong Kong, by Standard & Poor's LLC, which is regulated by the Hong Kong Securities Futures Commission; in Singapore, by Standard & Poor's LLC, which is regulated by the Monetary Authority of Singapore; in Japan, by Standard & Poor's LLC, which is regulated by the Kanto Financial Bureau; and in Sweden, by Standard & Poor's AB ("S&P AB"). The research and analytical services performed by SPIAS, S&P LLC, and S&P AB are each conducted separately from any other analytical activity of Standard & Poor's. Disclaimers This material is based upon information that Standard & Poor's considers to be reliable, but neither S&P nor its affiliates warrant its completeness, accuracy, or adequacy, and it should not be relied upon as such. With respect to reports issued by S&P LLC-Japan and in the case of inconsistencies between the English and Japanese version of a report, the English version prevails. Neither S&P LLC nor S&P guarantees the accuracy of the translation. Assumptions, opinions, and estimates constitute Standard & Poor's judgment as of the date of this material and are subject to change without notice. Neither S&P nor its affiliates are responsible for any errors or omissions, or for results obtained from the use of this information. Past performance is not necessarily indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments, or strategies mentioned herein may not be suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. Prices, values, or income from any securities or investments mentioned in this report may fall against the interests of the investor, and the investor may get back less than the amount invested. Where an investment is described as being likely to yield income, please note that the amount of income that the investor will receive from such an investment may fluctuate. Where an investment or security is denominated in a different currency to the investor's currency of reference, changes in rates of exchange may have an adverse effect on the value, price, or income of or from that investment to the investor. The information contained in this report does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations, or needs, and is not intended as a recommendation of particular securities, financial instruments, or strategies to you. Before acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. For residents of the U.K.: This report is only directed at and should only be relied on by persons outside of the United Kingdom or persons who are inside the United Kingdom and who have professional experience in matters relating to investments or who are high net worth persons, as defined in Article 19(5) or Article 49(2) (a) to (d) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001, respectively. Readers should note that opinions derived from technical analysis might differ from those of Standard & Poor's fundamental recommendations.  Clarke is an equity analyst following alcoholic-beverage stocks for Standard & Poor's All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is or will be, directly or indirectly related to the specific recommendations or views expressed in this research report. Standard & Poor's Regulatory Disclosure Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc.
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