“And we all say: OH!
Well I never!
Was there ever
A Cat so clever
As Magical Mr. Mistoffelees!”
- Andrew Lloyd Webber
On this date in 1982 the musical Cats began a run of nearly 18 years on Broadway. The musical by Andrew Lloyd Webber was based on a collection of T.S. Eliot poems in “Old Possum’s Book of Practical Cats.”
A musical consisting of performers dressed up as human sized cats singing to another superior cat who judges which of them will be allowed to die and ascend into cat heaven to be reborn (cats have nine lives), seems like a failed script from “The Producers” rather than a recipe for a theatrical blockbuster. Andrew Lloyd Webber even had to take out a second mortgage on his house for the down payment of the theater after some investors balked at backing the production.
However, the musical turned out to be an unprecedented smash hit with mainstream commercial success. After its debut the show became an immediate hit so successful that the London theater production ran for 21 years straight. The business side of production also had several hidden advantages towards the musical’s accomplishments. The stars were hard to recognize behind whiskers and cat makeup, facilitating cast changes. It had a bizarre, yet simple plot – perfect for tourists and people who do not even speak the language. Instead of trying to explain the intricacies of the plot to customers, marketing simply consisted of alluring cat eyes. The rate of return for investors in the feline musical was estimated to have exceeded +3,500%. A massive number indeed.
Of course, hindsight is 20/20 when determining what is a Broadway hit and what lines the kitty litter.
Back to the Consumables Grind…
It may be an exercise in futility to understand how to spot the next Cats, but that is what I aim to accomplish within the Consumer Staples space. I want to invest in the multi-year, multi-homerun, secular growing consumer companies that have visibility in top line growth and margin expansion. I had never analyzed a Consumer Staples company until the 2013 announcement that Constellation Brands was acquiring the exclusive U.S. distribution rights to the Grupo Modelo brands. Constellation Brands also paid what it could afford, not what the brands were necessarily worth. This is because Anheuser Busch InBev needed regulatory approval for the acquisition of the Grupo Modelo globally.
Recognizing the value creation of the acquisition netted investors over 650% over the past eight years. When the deal was announced, the Corona brand was seen as the value in the deal. The less known Modelo Especial brand represented future upside. At the time investors were concerned that the brands would lose the support of Budweiser distributors when ownership changed over to Constellation Brands.
What the market did not understand was that every distributor wanted to carry the Grupo Modelo brands, but Budweiser distributors more often carried the brands because of its joint ownership. Once freed up to optimize its distribution, sales accelerated under Constellation Brands’ leadership. All it took on my part to understand that the distributor risk was actually the investment opportunity were due diligence calls with beer distributors and not losing sight of the opportunity among the noise.
Unlike the mass appeal of Cats, the appeal of Modelo Especial is much easier to understand. I can tell you the light, crisp, slightly sweet Mexican style pilsner-lager with a gold foil neck is an easy drinking, seemingly premium beer. Various demographic groups feel that it is their beer. When consumers are surveyed for unaided brand awareness Modelo is listed at 7% of general market drinkers compared to 35% for Corona.
That is remarkable considering it is the now the second largest beer brand in the U.S. and the only beer in the top five that is not a low-calorie beer. In 35 of the past 38 years Modelo has seen double digit growth in the U.S., a growth streak that is more impressive than Cats’ 18 year run on Broadway. However, you don’t have to drink Modelo to understand the growth driver. Its destiny is demographics as seen below.
Modelo’s impressive growth streak will continue, it’s written in the birth certificates. Constellation Brands is a Best Idea long in the Consumer Staples position monitor. ¡Viva!
If you would like to learn more about my research team's in-depth investing research please reach out to .
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 1.42-1.62% (bullish)
UST 2yr Yield 0.25-0.33% (bullish)
SPX 4 (bullish)
RUT 2185-2291 (bullish)
NASDAQ 14,180-15,175 (bullish)
REITS (XLRE) 43.99-45.51 (neutral)
Tech (XLK) 146.94-156.10 (bullish)
Utilities (XLU) 63.11-65.95 (bearish)
Energy (XLE) 50.74-55.91 (bullish)
Financials (XLF) 37.24-39.41 (bullish)
Have a great weekend,
Daniel Biolsi
Consumables analyst
