Investment Opportunities in Diageo
Posted on: October 17, 2008 - Email Article - Printable Version
During a time of great uncertainty in the stock market, investors are looking to minimize the risk in their portfolios. With a flight to the safe haven well underway, it is tough to look past the position of strength Diageo PLC [DEO: 58.44, 0.00 (0.00%)] has maintained throughout this latest economic downturn. Diageo is the main player in the global wine and spirits business carrying a number of the world’s most popular brands among which are Smirnoff vodka, Johnnie Walker scotch whiskey, Captain Morgan rum, and Crown Royal Canadian whiskey.
Showing Strength in Rough Times
With a market cap of $48.3 billion, their powerful brand recognition and global footprint, Diageo has weathered the worldwide economic swoon. Earnings for the 2008 fiscal year ended in June with numbers remaining strong as net sales increased by 7%, underlying EPS up 11%, and there was also a 5% hike in the dividend. The main contributor to their continued growth in net sales was the international markets from Latin America to the Middle East with net sales rising 16% versus 3% in Europe and 5% in North America. They also reported back in June that they have partnered with The Nolet Group of the Netherlands to form a new company that has exclusive rights to the super-premium Ketel One Vodka and Ketel One Citroen. Diageo continues to expand its reach even as the global economy slows.
Outlook
With forward 2009E PE of 15.1x and 2010E PE of 13.7x, there is plenty of room for growth with or without a turn around in the global markets. Everything from rising corn, wheat, and aluminum prices has put a damper on Diageo’s bottom line. Also with the sharp rise in petrol prices this year, transportation costs have been a major concern. Even with rising input costs due to the commodities boom and the recent strengthening of the dollar versus the pound, Diageo has kept focused on the future to provide top of the line products to consumers all around the globe. Recent deflationary forces have helped relieve DEO’s problems with rising commodity prices, but high input costs are a problem management must deal with in the long run.
Who else is out there?
As far as the competition with Diageo, there is no one even remotely close to their proven track record in Europe and North America and penetration into emerging markets. Two of their closest threats, Brown-Forman Industries and Central European Distribution Corp. [CEDC: 23.57, 0.00 (0.00%)] have strong brands in the major markets but not near the worldwide exposure of Diageo. Central European Dist. Corp. is the smaller of the two players with a meager $2.57 bil market cap compared to DEO and makes their market primarily in Poland. Brown-Forman on the other hand has been hyped up as the next big player in the alcoholic beverage industry with characteristics of a young Diageo years ago. As one of the biggest American-based winery and distiller and product reach to 135 countries, there is much upside growth possible with added branding and continued global expansion. With strong market share from top-quality brands such as Jack Daniel’s and Southern Comfort driving domestic growth, and over 50% of consolidated sales arising from overseas, Brown-Forman looks to be an increasingly viable competitor to Diageo’s stranglehold on the market as a whole. But with a market cap of just under $10 billion and the risk level of their ventures into the international and emerging markets, they just cannot be held in the same light as Diageo.
Best of Breed
Overall, Diageo is the most dominant when it comes wine and spirits around the world. With proven consistency in increasing sales and doubling their dividend over the last 10 years with year over year dividend growth around 8%, their position in the market cannot be questioned as less than best of breed. Having a gross margin of 59.86% and return on assets 10.16% almost triple the industry average, it is easy to see the strength Diageo holds over the field. Projections for fiscal 2009 and 2010 combined with a recent slump extending back to the beginning of summer, have provided investors with a real opportunity to own a top company at a reasonable price. With the current stock market turmoil and 5-year lows on the Dow, Diageo has become an even more enticing bargain even after it recent pop. Keeping a close watch of the financial markets and any future bank failures will have an effect on the markets as a whole, but the sin stocks tend to be fairly stable even during economic slowdowns. On top of it all, their 5% dividend isn’t a bad way to wait out the financial mess.
- Chris Barrella
Disclosure: None
The Following Stocks Were Mentioned In This Article: BF-B, CEDC, DEO
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A fellow dividend investor recently posted on my site a disclosure that he made a purchase in DEO. See http://www.dividendsanonymous.com/2008/10/dividend-express.html if anyone is interested.
Diageo is a great company with solid fundamentals. While I think many can perceive it to go lower here in the short-term, it’s trading at a very attractive valuation with almost a 5% yield