Global consumption of spirits and wines is on the rise, reflecting the combined effect of a shift away from beer in developed countries and rising incomes in emerging markets.

In the industrialized world, there’s been a re-emergence of cocktails — particularly drinks that are vodka-based — and a growing appetite for pre-mixed, spirit-based drinks, which are targeted at women. In emerging markets, consumers’ consumption of spirits increases as income rises and the products become more affordable. As well, consuming high-priced liquors is a way to show off new wealth in these parts of the world.

Companies benefiting from these trends include Fairport, N.Y.-based Constellation Brands Inc., Davide Campari-Milano SpA of Milan and Pernod Ricard SA and Rémy Cointreau Group, both based in Paris.

Outside of premium brands, wine is generally the hardest sector in which to make money because the world is awash in wine — and that’s why wine-focused Constellation tends to be the least popular of these companies with money managers.

The other three companies are primarily in spirits or high-priced wine-based products such as cognacs and liqueurs — a sector in which there’s been a lot of consolidation. Besides London-based Diageo PLC, Campari-Milano, Rémy Cointreau and Pernod Ricard are the only relatively big ones left. They have the advantage of very strong brands and high returns, says Charles Burbeck, head of global equities at HSBC Halbis Partners in London.

Burbeck adds that the industry’s structure is attractive because capital requirements are low, return on capital is high and pricing is pretty good. “Companies are able to put through quite reasonable price increases. It’s a nice growth phase,” he explains.

Here’s a look at the four companies in more detail:

> Constellation Brands Inc. As mentioned above, no one is enthusiastic about Constellation because the world is overflowing in wine. Nevertheless, Bernstein Investment Research and Management in New York just increased Constellation’s rating to “market perform” from “underperform”; UBS Ltd. in London has it at “neutral.” Bernstein’s 12-month target price is US$27 and UBS’s target price is US$29, vs the US$24 it closed at on Jan. 31 on the New York Stock Exchange.

In increasing its recommendation, the Bernstein report states the stock is “now appropriately reflecting the company’s growth and return prospects” following its sharp decline after reporting disappointing results for March through November 2006, the first nine months of fiscal 2007, which ends Feb. 28.

The Bernstein report also says the economic attractiveness of the wine industry is relatively low, given high capital intensity, lack of brand pricing power and low barriers to entry, all of which “limit the company’s ability to generate free cash flow.” This is currently underlined in Britain, where Constellation’s volume and pricing trends are “at the mercy of industry supply/demand imbalances and powerful retailers.”

Price competition and challenging volume growth in Britain is also cited by UBS in its Jan. 5 report, in which it lowered its price target to $29 from $32, although it kept the company at a neutral rating. The UBS report says even with the drought-reduced harvest in Australia this year, it will take “at least several years for wine supply and demand to come into balance.”

UBS is optimistic about the company in the longer-term, reporting that it has built “an increasingly attractive product portfolio over the past 10 years.”

Constellation made US$261.7 million in the first nine months of fiscal 2007, down a little from US$267.1 million during the same period in fiscal 2006. Net sales were up 14.6% in the period, to US$4.1 billion from US$3.6 billion.

There are 210.6 million Class A common shares and 23.8 million Class B convertible common shares outstanding. The Class B shares — which are convertible to Class A shares at any time and whose dividends are at least 10% lower than those paid on Class A shares — are 95% owned by company executives and directors. The Class A shares are widely held.

> Davide Campari-Milano Spa. Burbeck recommends the firm; UBS had a neutral rating on the company, with a 12-month target price of 7.80 euros — slightly lower than the 7.90 euros it closed at on Jan. 31 on the Milan Stock Exchange.

Campari brought in new man-age-ment to take over from the Garavoglia family that founded the company, when it went public in 2001. The mandate of the team — which Burbeck considers to be very good and in whom he has a lot of confidence — was to manage both the spirits and wine portfolios more aggressively.

@page_break@Campari has been “very good” at buying brands on the cheap, investing in them and managing them, says Burbeck. The company also has done a very good job in spotting trends and investing in second- and third-tier brands that are under the radar of the bigger companies, or in creating new brands to take advantage of those trends.

An example is Skyy Vodka, produced by California-based Skyy Spirits LLC, in which Campari first invested in 1998 and now owns outright. Campari has invested heavily in the brand and volumes have increased “massively,” says Burbeck.

But it’s been in countries such as Brazil, Italy and Spain that the company has been particularly successful, says Burbeck, noting that a lot of its brands are not appealing to the Anglo-Saxon market.

Campari entered the scotch whisky market in early 2006 with the acquisition of Glen Grant and two much smaller scotch brands from Pernod Ricard. Glen Grant is an underinvested brand that will need up-front marketing. Campari is currently relaunching Glen Grant in the U.S. and is also increasing the focus on its core Campari brand in that market.

Campari made 55.5 million euros in April 2006 through September, the first six months of fiscal 2007, vs 53.4 million euros for the same period a year earlier. Net sales were up 14.8%, to 417.8 million euros.

Alicros SpA, owned by the Garavoglia family, controlled 51% of the 290.4 million outstanding shares as of June 30, 2006.

> Pernod Ricard SA. This company is recommended by Patricia Fee, a money manager at IG International Management Ltd. in Dublin, and by Stephane Champagne, a portfolio manager at Signature Ad-visors, a unit of CI In-vestments Inc. , in Toronto. UBS has a “buy” on Pernod Ricard, with a 12-month target price of 170 euros; Bernstein rates as neutral, with a higher target price of 160 euros. The shares closed at 157 euros on Jan. 31 on Euronext Paris.

The firm is now the second-largest global spirits and wine company, behind Diageo, following its 2005 acquisition of Britain-based Allied Domecq PLC. Pernod Ricard’s sales in fiscal 2006, ended June 30, 2006, were 6.1 million euros.

Whiskies, including Chivas Regal, Jameson, Ballantine’s and Glenlivet, account for 42% of the firm’s spirits volume. White spirits and rums, including Beefeater’s gin, Stolichnaya vodka and Havana Club and Malibu rums, account for 25%. The core aniseed-based drinks, including Ricard, account for 11%; liqueurs, including Kahula, another 11%. Brandies and cognacs, including Martell, account for 8%.

The company also produces champagnes, including Mumm and Perrier-Jouet, and owns Aus-tralia’s Jacob’s Creek and New Zealand’s Montana wineries.

Formed in 1975, Pernod Ricard has made many acquisitions over the years, the most important of which were the joint purchase with Diageo of the Seagram spirits and wine business from Paris-based Vivendi SA in 2001 and the Allied Domecq acquisition in 2005. In the case of Seagram, Pernod Ricard contributed 39% of the purchase price and divvied up the brands with Diageo.

Pernod Ricard’s strategy is to focus on premium brands rather than chase volume, says Fee. For example, it is launching new wine varieties, focusing on the premium segment, including “reserve” wines.

It has also done very well in China, and Fee expects that to continue. In her view, growth in earnings per share should be in the mid- to high teens. She believes the share price will reflect this once the market is convinced that the Allied Domecq integration is positive for the company.

Champagne views the compa-ny as being in transition, noting, “It will take at least two years to finish the integration and get the synergies.”

UBS has increased its estimate of average annual compound sales growth for 2008-10 to 6.3% from 5.4% because of revenue synergies in Asia and Mexico and a new marketing campaign for a number of brands.

Another positive is the sale of 5% of Pernod Ricard’s stock in late January to Groupe Bruxelles Lambert. UBS thinks this could result in an investment of two billion euros in the business. UBS is not ruling out further share sales to Groupe Bruxelles.

With the Allied Domecq purchase, Pernod Ricard made 670 million euros in the fiscal year ended June 30, 2006, vs 493 million euros the year prior. Net sales were 6.1 euros, a significant increase from 3.6 billion euros in 2005.

Of the 90.9 million shares outstanding, Paul Ricard SA owns 10.7% of the shares and has 17.7% of the voting rights. There is only one class of shares, but shares held for 10 years have two votes a piece.

> Rémy Cointreau Group. Burbeck and Champagne consider this company to be fairly valued right now; UBS has a neutral rating on it, with a 12-month target price of 50 euros, around the 50.50 euros the stock was trading at on Jan. 31 on Euronext Paris. (The UBS target price includes a 10% premium to fair value because of the possibility of a takeover.)

New management took over in 2004 from the Dubreuil family, which still controls the company; as well, a member of the family is the company’s chairwoman. The family held 43.6% of the 45.5 million shares outstanding as of Mar. 31, 2006, and 54.8% of the voting rights. Pierre Cointreau had 13.8% of the shares and 17.1% of the voting rights. The public float is 42.5%, of which Arnhold and S. Bleichroeder LLC has 13.9% of the shares and 8.8% of the votes.

Cognac is Rémy Cointreau’s biggest product, accounting for 43% of total sales from April 2006 through December, the first nine months of fiscal 2007. Champagne accounts for 17% of sales; liqueurs and spirits, for 27%. The main brands are Rémy Martin cognac, Piper-Heidsieck and Charles Heidsieck champagnes and Cointreau liqueur.

The company also distributes “partner” brands, including several scotch whiskies, vodka and some California wines, which accounted for 13% of the company’s total sales during this nine-month period. However, sales of these partner brands were down 19%, vs the same period the previous year, because of the cessation of some wine contracts. The company expects this decline to be offset by increased sales of Russia’s ultra-premium Imperia Vodka. Sales of Rémy Cointreau’s own champagne were up 5.3% in the period, while cognac was up 4.2% and liqueurs and spirits were up 1.9%.

Rémy Cointreau has decided to take control of the distribution of its brands in China and other key countries in Southeast Asia as of March 2009, when its 25% interest in the Maxxium distribution joint venture expires. Established in 1999, the joint venture distributes in most major spirits markets outside the U.S., South America, Africa and India. The other members of the joint venture are Beam Global Spirits & Wine Inc., the Edrington Group and V&S Group.

Rémy Cointreau made 76.1 million euros from April 2006 through September, vs 39.1 million euros a year earlier. Net sales for those six months were 354.4 million euros, almost unchanged from 353.2 million euros for the same period in the year prior. IE