Diageo Earnings Prove Bears Are Still Drinking

The world largest alcohol distributor, Diageo (DEO) reported stellar 2nd half of last year earnings and revenue numbers. The maker of Smirnoff Vodka and Johnnie Walker Scotch showed results of $1.9 billion in profit and reiterated full year guidance despite what is seen as uneven economic conditions in its largest market, the US.

The numbers overall represented 9% growth and guidance which kept the company on pace for a further 9% in organic growth throughout 2008. Sales were up over 6% to $8.4Billion. North American results spoke for themselves: 8% growth on strong sales of Johnnie Walker, Smirnoff and Captain Morgan. Despite the weakening US economy, Diageo put the pedal to the metal in advertising, increasing spending in that area. This clearly worked, creating far more brand awareness than in previous periods. Diageo is also trying to expand its line-up of liquor offerings, after deciding not to go after Absolut Vodka, the company purchased a 50% stake in Ketel Vodka.

The real successes came internationally, with growth rates of 20% and 16% for profits and revenue respectively. Investors were very satisfied with the quarter and the guidance, sending shares up 4% on the day. The company is by far the world leader in alcohol and this is another chance to snap up shares relatively cheaply. A P/E ratio in the mid to high teens for this industry leader is more than fair, and with a dividend yield approaching 4%, it screams "Buy," especially when considering the strong international and emerging markets push that Diageo is undertaking.

The fact of the matter is, alcohol sells despite economic downturns or slowdowns. When it comes to safe havens, the gurus of investing always talk about the consumer stocks that will never go away, but alcohol is and has proven once again it is one of the strongest selling consumables on the planet. And that is something worth investing in.

Disclosure: Author owns DE

Comments

[Les Mitchell]

Why the strong volatility? I've owned the stock since last summer and I'm begining to get sea sick.