Happy Hours For Liquor Stocks As Newest 'Mad Men' Lift Vintage Beverages

This article originally appeared on Motif Investing.

Once thought to be as dead as three-martini lunches, booze is back.

Pushed by two decades of relentless marketing by the alcohol industry, liquor is replacing beer as America’s adult beverage of choice. Not only are members of the Millennial generation, the nation’s largest population cohort, entering prime drinking age, but they’re insisting upon premium liquor brands that yield higher profits. It’s not all single-malt Scotch and craft beer, either – Millennials drank almost 160 million cases of wine in 2015, more than any other generation. And although they make up only one-quarter of the drinking-age population, Millennials drink roughly one-third of hard liquor sold in the U.S.

This is good news for investors who have bought shares in liquor companies. Since the 21^stAmendment repealed the Volstead Act (Prohibition) in 1933, liquor companies have been forced into a competitive disadvantage by state and federal government. They’ve been taxed at rates higher than beer or wine, limited in retail outlets, and restricted in advertising. Decades of effort, however, may have turned the tide for hard liquor companies: Millennials are more likely than other generations to spend more for quality beverages and less likely to plan their spending in advance, which may be why shares in liquor company companies have gained almost 10 percent over the last year.

Marketing Turnaround

Much of the success of the liquor industry can be attributed to Diageo plc (ADR) DEO, the world’s largest distilled spirits producer that was created in 1997 by a merger between Grand Metropolitan and Guinness. The company focused on its “white” brands such as vodka and rum, rather than the “browns” of whiskeys and bourbons. Besides having a less-harsh taste, the white liquors could be mixed with fruit flavors and sugar to create a flavor more attractive to young people.

The company introduced Smirnoff Ice in 1999 with an aggressive marketing campaign. Its product was criticized as an “alcopop” by public health advocates but soon gained almost 30 percent of the flavored malt beverage category. Over the next two decades, Diageo would lock up almost 20 percent of the North American spirits market. After a flat couple of years, the company reported that its fast-growing brands, such as Crown Royal, showed steady growth. Meanwhile, Diageo brands that had lost sales, including Smirnoff, Captain Morgan, Johnnie Walker and Tanqueray, showed modest gains last year.

Diageo may be one of few U.K.-based companies that stand to benefit from the “Brexit,” or British departure from the European Union. It’s true that the phrase “Scotch whiskey” may lose the protection granted E.U. products such as Feta cheese, Champagne or Parma ham as a result of the withdrawal from the 28-member alliance. The Brexit, however, has caused the British pound to plunge, making Diageo’s Scotch whiskey more affordable overseas.

Constellation Brands, Inc. STZ, the No. 3 beer company in the U.S. and the largest wine producer in the world, also has been dealing with geopolitical issues. The owner of brands such as Black Velvet Canadian Whisky, Robert Mondavi wines, and Svedka Vodka, its stock shot up almost 700 percent since 2012 – about eight times better than the S&P 500 during the same period. But shares in the Victor, N.Y.-based company have gained a little more than 10 percent over the last year, primarily over investor concerns that a “cross-border adjustment” with Mexico that’s favored by the Trump administration will cut into Constellation profits. Brown-Forman Corporation BF, the Louisville, Ky.-based maker of Jack Daniel’s whiskey, has seen its shares fall almost 2 percent over the last year. The company sold its Southern Comfort brand in January 2016 to focus on stronger whiskey brands and may be well-positioned for future growth. Over the last decade, Brown-Forman has returned $5.6 billion of its $8 billion in cash income to investors via dividends or stock repurchases; the remainder has been spent on capital improvements or acquisitions.

Big Beer

Despite the Millennial turn to hard liquor, beer is far from becoming ancient history. Craft beers, which made up 5 percent of the $100 billion U.S. beer market in 2010, had gained enough to take over 11 percent of the market by 2014. While they’re being hard-pressed by independent and craft breweries, Anheuser Busch Inbev NV (ADR) BUD and MillerCoors account for roughly 72 percent of domestic sales. Anheuser-Busch completed its $103 billion purchase of SABMiller in September 2016. While the U.S. Justice Department required the Belgium-based brewer to agree not to restrict distribution of craft beer, the giant brewer may be able to use its size to control the supply of essential ingredients, such as hops.

While the dust settles from its acquisition, Anheuser-Busch isn’t sitting on its laurels. The brewer is working on a deal to develop an alcoholic drink maker with Green Mountain Keurig, the Waitsfield, Vermont-based firm best known for its single-serving coffee pods. Anheuser-Busch also acquired Northern Brewer, one of the largest suppliers of home brewing equipment, in October, giving it a strong foothold in the $1 billion homebrew supply market. Ambev SA (ADR) ABEV, the leading brewery in Brazil – the world’s third-largest beer market – has had a less tumultuous year, even though Anheuser-Busch is its corporate parent. Ambev, which controls 60 percent of the Brazilian market, has seen its shares gain more than 10 percent during the last year amid economic headwinds and political turmoil in its biggest market.

A third beer giant, Molson Coors Brewing Co TAP, has edged up about 5 percent over the last year, mostly on the strength of continued dividend increases and debt reduction. The company, which was created in 2005 by the merger of Coors and Molson, the company strengthened its global hand when Anheuser Busch’s acquisition of SABMiller required it to divest its 58 percent stake in MillerCoors. Molson Coors also has focused on building its Millennial-friendly craft brands such as Blue Moon, which has grown for 81 quarters in a row.