True or false: alcohol stocks are recession-proof?

While not immune, many alcohol stocks are weathering the economic hangover

Ann Gilpin 15 June, 2009 | 4:38PM

True or false: alcoholic beverages companies are recession-proof? Contrary to popular belief, technically, the answer is false.

We would argue that alcoholic beverages companies are recession-resilient rather than recession-proof as they still experience cyclical demand. However, while consumers are trading down to lower-priced brands and curbing their consumption, especially at bars and restaurants, most alcohol companies are still highly profitable--evidence of the moats within the industry. (Click here to discover how Morningstar measures economic moats.) Given the right brands and adequate scale, producing and selling alcoholic beverages is a beautiful business: brand loyalty is high, growth is stable, and profits are robust in good times and bad. In fact, despite the effects of trading down, alcohol has comprised a very steady percentage of the United States consumer's total food budget for over 130 years, save for Prohibition, which lasted from 1919 to 1933.

Fortunately, the market appears to be overly discounting the attractive attributes of our alcohol beverage company coverage list. After baking the impacts of a stronger dollar and a weaker consumer environment into our valuations, the industry looks undervalued, trading at an average price/fair value estimate of 0.88 as of June 8, 2009. We do have a few favourites, which we'll detail later in the article. First we'd like to take a closer look at some issues facing the alcoholic beverages industry.

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About Author

Ann Gilpin  Ann Gilpin is a Senior Stock Analyst with Morningstar.

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