Ole Hansen
As the Chinese stock market bubble bursts, Saxo's Ole Hansen looks at the dramatic effect this is having on world commodities and growth.
Article / 21 September 2011 at 8:13 GMT

Cheap alcohol stocks in the market!

Strategist & Equity Analyst / Private

Alcohol producers Royal Unibrew, Constellation Brands and C&C Group appear to be potential takeover candidates and investing in these relatively cheap defensive stocks now amid such volatile and difficult investment times might be a sensible step to take.

In our ‘Devil’s Stock’ theme we highlighted the apparent investment advantages of sin stocks, of which alcohol is included. In this theme we take a closer look at the alcohol sector which is much less volatile than some of the other sin stock sectors as incomes are predictable (exactly what we need at the moment) and investors are generally willing to pay a high premium for this. In this analysis though we have found companies which are priced at market level P/E, which is a good start.

When a private equity company wants to take over a company some basic criteria needs to be invariably met before proceeding. Stable sectors are always preferred as this makes higher leverage possible and therefore results in a higher return on the overall investment. Stable consumption is therefore ideal.

Low current debt is therefore also preferred and the more Free Cash Flow (FCF) the better, as the company has a reliable “engine” to pay off its debt. In chart 1 we show Net Debt / EBITDA versus Free Cash Flow to Market Cap. Both are relative measures so as not to discriminate between large and small companies. Notice though that the overall market cap size has been limited to USD 5 bln in order to allow for a reasonable chance of takeover. The best selection is illustrated in the triangle, as more debt should be followed by more FCF.

But you don’t want to pay too much for a company measured by Price Earnings. In comparing the level of Return on Equity it is easier to select the best combination. The best selection based on these metrics is shown in chart 2.

Combining the selections
In the two selections we have identified five companies of interest as these have the right characteristics concerning sector, size, price, possible leverage and FCF. The companies have been scrutinised for large investors who could potentially block a takeover attempt, and in two of the candidates a stake of 35 percent is placed. In these cases a takeover is less likely to happen, but you never know. That leaves three candidates: Royal Unibrew, Constellation Brands and C&C Group which all have low P/E and look cheap compared to the overall market i.e stable companies trading at no premium. On top of this Royal Unibrew has a very large expected dividend yield of 6.2 percent. See table 1 for more details about the companies.

Make sure however that you do your own analysis before you consider these companies as investment opportunities.


The Saxo Bank Group entities each provide execution-only service and access to permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on or as a result of the use of the Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of ourtrading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer
- 沪ICP备13028953号-1

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail