3 Spirits Stocks for 2024

Investors may want to take note of the spirits industry's stability and its ability to navigate economic challenges. The following distillers are well-positioned to benefit from secular industry trends and profit from the growing global thirst for quality tipple.

Global spirits maker Diageo DEO’s popular brands include Johnnie Walker blended scotch, Smirnoff vodka, Crown Royal Canadian whiskey, Captain Morgan rum, Casamigos tequila, Tanqueray gin, Baileys Irish Cream, and Guinness stout.

The firm also has a 34% stake in premium champagne and cognac maker Moet Hennessy, a subsidiary of French luxury-goods maker LVMH Moet Hennessy-Louis Vuitton, and around 56% stake in India's United Spirits.

Diageo has followed the mergers and acquisitions strategy to establish itself as a global industry leader, says a Morningstar equity report, adding that this has broadened the firm’s product portfolio.

The spirits industry experiences more cyclical volume changes compared to beer, often driven by transient trends. For instance, the recent move from white spirits, primarily vodka, to brown spirits marks a reversal of the trend seen in the 1990s. “Diageo's broad presence across categories with both global strategic and local niche brands mitigates some of the risk to volume from such shifting consumer preferences,” says Morningstar equity analyst Philip Gorham.

Wide-moat Diageo is primed to benefit from the ongoing trend of consumers trading up as they pick spirits over beer and wine. “A continuation of that trend could support Diageo's volume in developed markets, despite an underlying headwind of falling alcohol consumption,” assures Gorham, who recently raised the stock’s fair value to $157 per ADR from $148 to account for the slightly better than expected results in the first half of fiscal 2024.

Makers of the globally favoured whiskey brand Jack Daniel’s and bourbon brands Woodford Reserve and Old Forester, U.S.-based Brown-Forman BF.B generates about 70% of revenues in the whiskey category. The distiller also makes tequila, vodka, rum, gin, and premium wines. U.S. accounts for 47% of sales, while the bulk of international revenues come from Europe, Australia, and Latin America.

With over 150 years of distilling experience specializing in Tennessee whiskey and Kentucky bourbon, Brown-Forman has garnered global praise and customer loyalty for its unique flavours and high quality.

“We are constructive on the growth prospects of the premium spirits maker, as its high-end positioning in the structurally attractive whiskey category aligns well with the industry’s premiumization trend,” says a Morningstar equity report.  

The company has expanded to new categories of gin and rum through acquisitions of super-premium brands. The move should “broaden the appeal of Brown-Forman’s overall alcohol portfolio and add a new avenue of growth, though the revenue contribution will likely be limited in the near future,” says Morningstar equity analyst Dan Su, who recently lowered the stock’s fair value to US$63 from US$68, incorporating weaker-than-expected results in the first half of fiscal 2024 and a tempered outlook for the full year.

However, Brown-Forman boasts a wide moat built on strong brand loyalty and the sticky client relationships that the distiller has cultivated and maintained for decades in its core whiskey business (70% of total sales), Su adds.

The world's second-largest spirits maker by volume, behind Diageo, Pernod Ricard RI boats a portfolio of globally recognized labels. Some of its most favoured brands are Absolut vodka, Beefeater gin, Chivas Regal and The Glenlivet scotch whisky, Jameson Irish whiskey, Malibu rum, and Martell cognac. Europe, the U.S., and Asia are its key markets.

Pernod Ricard has made a series of strategic acquisitions to become the world's number-two distiller, says a Morningstar equity report.

“The breadth of Pernod's portfolio across categories, with both global strategic and local niche brands, mitigates some of the risk to volume from shifting consumer preferences,” the report notes

The trend towards premiumization - increasing demand for higher-quality and more expensive spirits -- is expected to provide ongoing support and benefit to Pernod.

In advanced economies, people are choosing spirits over beer and wine because they prefer higher-quality drinks. “A continuation of that trend could support Pernod's volume in mature markets, despite an underlying headwind of falling alcohol consumption,” says Gorham, who appraises the stock to be worth EUR 185.

In emerging markets, though, consumers are upgrading their choices within the same category rather than switching between different types of drinks. Gorham maintains that cognac sales in China are expected to continue driving growth for Pernod in the near future.

Strong pricing power and ample headroom for mix improvement could help Pernod's revenue to grow at 4.7% in the steady state, he forecasts.