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How One Overseas Bid Proves We're on Two "Right Tracks"
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The common misconception is that so-called "sin stocks" only perform well when the economy tanks.
But the truth is that purveyors of alcohol and tobacco take their lumps during a recession just like everybody else.
That was certainly true of the world's largest spirits company Diageo PLC (NYSE: DEO), which traded as low as $42 a share in 2008. Of course, the stock has more than doubled since then, closing Friday at $93.38.
Shares of cigarette-maker Philip Morris International Inc. (NYSE: PM) have nearly doubled in the past two years, as well.
Still, you don't have to worry if you missed either of those rallies because there's still plenty of room for these two sin stocks to run.
Indeed, more and more consumers are returning to their vices as the global economy improves.
For instance, liquor sales, which stagnated in 2009, rose 4% last year, while sales of top shelf spirits increased 5.3% — a near return to pre-2008 levels.
What's more is that these gains came at the expense of the beer market, which typically has the upper hand in tough economic times.
"People who are doing well are going out and spending on spirits as an affordable luxury," John McDonnell, chief operating officer for The Patron Spirits Co. and chairman-elect of the Spirits Council, told Bloomberg. "Also, spirits companies never stopped spending through the downturn."
The same goes for tobacco products, which have been gathering steam in emerging markets even while they fall out of fashion in developed countries like the United States.
So let's take a closer look.
Diageo – the company behind Baileys, Captain Morgan, Guinness, Smirnoff, and Johnnie Walker – is the most obvious beneficiary of increased liquor sales.
These are powerful brands that helped Diageo actually increase its cash flow during the recession. And now that consumers worldwide are in a slightly more festive mood, sales are set to take off.
Diageo, which produces about 28% of the spirits sold in the United States, reported a 5% increase in liquor sales in the U.S. and Canada in the second half of 2011.
More importantly, the company continued to expand its business in emerging markets.
While volumes were flat in North America and Europe, Diageo generated 14% volume growth in Latin America, 7% in Africa, and 5% in the Asia-Pacific region.
And that's just the beginning for a company that has made developing markets the focus of its growth strategy.