Diageo: Capitalize on Life's Certainties

When times are good and when times are bad, it's a fact of life that people will drink either way.

Probably one of the most sustainable business models on the planet is making various alcohols. So for those interested in the long term investment opportunities, where would you start looking?

Well in your own liquor cabinet of course! Any bottles of Johnnie Walker scotch lying around? Maybe some Smirnoff vodka? Perhaps some Cuervo tequila is more your style? Oh you're a beer drinker, is that it? Ever had a Guinness?

What do all those brands have in common? Well they are all owned and distributed by Diageo (DEO).

This is a company that has had a very good 8 months with the stock moving from a 52 week low of $65/share to a high of $87. With the stock sitting at $85, is it still worth looking at? I say yes.

Sales growth is increasing worldwide, but most notably in North America, where trends of late are showing spirits are making their way into more homes while traditional beer drinkers are turning away. Maybe it's the whole carbs craze, but either way, the numbers don't lie.

Diageo sits with a P/E of about 18 right now, and pays almost 2.5% in dividends, which is very reasonable for this type of company.

Yes, Diageo is the biggest player in terms of market cap in the alcohol space, but it is growing and relatively cheap compared to it's main competitors, which include the likes of Brown-Forman (BF.B), which owns Jack Daniels, Finlandia vodka and Southern Comfort; Constellation Brands (STZ), which controls Constellation wines and spirits and Crown products; as well as the beer kings Molson Coors Brewing (TAP) and Anheuser-Busch (BUD).

The age of adage of "invest in what you know and buy yourself" certainly applies to these investments, so it's a matter of opening up the good cupboard, taking out your fine bottle of scotch and going from there. If it happens to be a Johnnie Walker, then by all means get on the Diageo train.

DEO 1-yr chart

Disclosure: Author holds no positions in the above mentioned companies

Comments

[Davis Freeberg:]

Great article. A little tongue in cheek, but I like that. You are probably right that they are attractively priced for a large cap. The dividend is nice and they should be one of the last ones to suffer in a recession. Still, I like a little more risk/reward in the companies I look at. I don't follow the space very closely, but would be interested in finding out if there are any alcohol small caps that you know of. Is there anything a little smaller that looks attractive to you or have all the micro brews gone macro?

2007 Jul 18 09:13 AM

[Chris Kraso...:]

Thanks for the words about the article Davis. I wrote a comment on my own blog ( wcpowertechfund.blogsp... )after the Diageo article regarding your question. It was more detailed there. In essence, for a speculative play in the alcohol space I would suggest looking at CEDC. Central European Distributing. They make some vodkas in Poland and surrounding regions and they distribute over 700 types of liquor brands throughout Central Europe. They are however just off their 52 week high but sit at a market cap of $1.5Billion.

2007 Jul 19 07:06 PM