Should You Invest in Jose Cuervo?

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Sure, your better tequila-infused memories probably involve a dimly-lit tequila library or carefully savoring a glass from a handsome bottle of Casa Dragones. But chances are, you probably also have a fond memory (or eight) of a night spent with Jose Cuervo. Now the industry-leading spirit maker is reportedly seeking to raise about $750 million in an initial public offering.

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The family-owned company is one of a small group of brands like Bacardi and Patrón that have maintained independence in an industry controlled by a consolidated big four that already trade publicly: Diageo, Pernod Ricard, Beam Suntory and Brown-Forman. And in fact, Jose Cuervo was nearly acquired by Diageo five years ago but talks failed. At the time, analysts valued the company at $3 billion.

It’s hard to argue with the timing: the Distilled Spirits Council of the United States says that tequila sales have grown 106% since 2002. Due to the popularity, many bars have turned to present it to patrons as a top-shelf spirit, which in turn contributes to price points creeping upwards. Daniel Lugasi, president and founder of VL Capital Management, echoes this saying that trends in recent years have shifted in consumption to high-end tequila varieties while lower quality, mixed tequila shipments have remained flat. Lugasi, whose firm specializes in quantitative equity investing primarily driven by in-house computer systems, says that data from the Mexican Tequila Regulatory Council shows that developing countries such as China also represent untapped markets. "Tequila exports to the U.S. totaled 40 million gallons in 2015,” he says. “During that same period, exports to China totaled only 145,000 gallons or 0.3% of U.S. consumption. If tequila brands are able to market their products to developing economies effectively, they will have a very long runway for growth.”

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In general, as societal views toward drinking shift, so too will its investing landscape. “People are losing the stigma that has been associated with alcohol for such a long time,” says Mac Nichols, a brewery investor and co-owner of Yalobusha Brewery, in Water Valley, Mississippi. “New generations understand that it doesn't have to be about getting messed up or trashed.” It doesn't hurt, too, that a demographic shift in the consumer base for alcohol is underway as millennials begin displacing baby boomers, and a variety of Prohibition-era restrictions are being lifted, ushering in a mainstream craft beer era. "Millennials have more of an affinity for specialty brands that define a particular lifestyle as opposed to mass-produced alcoholic beverages," says Lugasi.

The potential IPO would mean that Cuervo would be joining the publicly traded ranks of brands like Diaego’s Don Julio and Brown-Forman’s Herradura. Diageo’s first-quarter earnings reports says that the Don Julio brand posted a 28% organic sales net growth, and Herradura also grew 28% in sales for Brown-Forman over the same period.

And Jose Cuervo's financials are certainly promising, from an investor's perspective. “Jose Cuervo is a profitable company with rapidly growing sales and expanding profit margins,” says Lugasi. This is bolstered by the fact that the company will likely not face any liquidity issues in the near future and possesses limited debt. Since Jose Cuervo previously saw a high level of demand for their $500 million bond sale in 2015, investors also believe this could be indicative of strong demand for an IPO. Even more, the lack of companies on the market devoted exclusively to tequila could boost demand for shares in the company.

Lugasi also says that Cuervo has some important considerations to take into account before going public. “As a private company, there is no shareholder oversight and all decisions are made by the Beckmann family, who own the majority interest,” he says. Going public means opening up to critique from analysts and shareholders alike, as well as any vulnerabilities that may arise from public transparency.

It's not yet known where Cuervo would list the shares – the U.S., U.K., and Mexico are among those in the running. The company is working with both JP Morgan Chase and Morgan Stanley on the deal. “The best investments in the alcohol industry are in categories experiencing strong sales growth and those with large addressable markets,” says Lugasi. And it's hard to imagine eternally coveted tequila shifting away from the masses, and onto the rocks anytime soon. 

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