Face-Off on Stocks: Diageo, Constellation, Brown-Forman [Video]


The holiday season usually brings good cheer to purveyors of wine, beer and spirits, but when it comes to booze stocks, some names are more palatable long-term buys than others.

Concerns about consumer spending still loom over alcohol stocks, especially given the tendency of folks to save money by curbing their consumption in bars and restaurants -- a significantly more profitable distribution channel for booze makers than drinking at home. Furthermore, there are worries states will raise sin taxes to make up for budget shortfalls. Still, the worst of the downturn seems to be behind the industry, making some of the bigger names worth a sniff.

The U.K.'s Diageo (DEO) is the world's biggest booze company, selling brands such as as Johnnie Walker, Smirnoff and Guinness in 180 countries. An yet the general uplift in consumer cyclical stocks -- and booze stocks in particular -- has left Diageo behind. Shares are lagging the broader S&P 500 ($INX) by about five percentage points so far this year, but then that's also made the valuation compelling. The stock currently trades at discounts to its competitors on both a trailing and forward earnings basis, and the dividend yield of 4.1% looks tempting, too.

The relative valuation picture at Constellation Brands (STZ), known for Robert Mondavi wines and Corona beer, among other brands, is cloudier. Shares in the world's No. 1 wine company have rallied 37% for 2010 vs. about 10% for the S&P 500. As a result, the stock looks expensive vs. peers on a trailing basis -- but compellingly cheap if analysts' profit estimates are on the mark.

The rub is that wine drinkers don't have much brand loyalty and have been trading down to cheaper (and therefore less profitable) labels for some time. Constellation's lack of pricing power in wine sales, which are responsible for nearly 90% its annual revenue, puts Wall Street's earnings forecasts into question.

Brown-Forman (BF.B), maker of Jack Daniels and Southern Comfort, among other brands, has a nice habit of returning cash to shareholders. The company has paid a dividend for 64 straight years, raised it for the last 25 years and -- on top of that -- just announced a $1-a-share special dividend. On the other hand, Brown-Forman's stock has leaped 30% in 2010. That has it trading at some lofty premiums to the industry on both a trailing and forward earnings basis, meaning shares may have gotten ahead of themselves.

For more on the bull and bear cases for Diageo, Constellation Brands and Brown-Forman, see the video above.