Seeking Alpha
Growth at reasonable price, healthcare, long-term horizon, value
Profile| Send Message|
( followers)  

Diageo (NYSE:DEO) is a United Kingdom based spirits company with a wide range of well known brands such as Johnnie Walker, Crown Royal and-Captain Morgan rums. With the fiscal uncertainty emanating from Europe, shares in this well run stable business may come under pressure offering a patient long term investor an attractive entry point. I will cite three main reasons for my positive opinion on DEO.

The spirits business is a recession proof business with its main hallmark being its stable and predictable revenues. DEO has a stable of iconic brands such as Guinness beer that consumers are willing to pay a premium for. The durability and appeal of these brands provides DEO a wide and defensible moat that it successfully uses to fend off generic "knock-off "brands. The appeal of DEO wide stable of iconic brands allows for stable and consistent revenues which can be used to fund further expansion by purchasing other established branded spirits.

The durability and demand for DEO products is evident by the following quotes attributed to Paul S Walsh CEO of DEO during the most recent conference call:

Stronger volume growth and improved price mix has accelerated our top line performance. Our volume performance improved in the developed markets, but it was the performance of our scotch, vodka and beer brands in the emerging markets, where volume was up 10%, which was the main driver of our overall growth. Together with the acquisition of Mey Içki and Serengeti Breweries, this increased our emerging markets business to almost 40% of the total.

Transcripts from most recent conference call courtesy of Seeking Alpha. As we can see from the above quote, the premium products that DEO sells have wide and growing demand which is having a positive effect on earnings. The growing demand for their products leads into my second reason for investment, which is DEO's aggressive expansion plans.

DEO has used its strong and stable cash flow to aggressively expand by expanding facilities and buying other brands. DEO recently announced a one billion GB pound Scotch whiskey expansion, which includes the construction of a new malt distillery. The expansion is due primarily to Scotch whiskey growing worldwide demand. DEO has also announced smaller deals such as the acquisition of the leading premium cachaca brand, Ypióca and the purchase of Ethiopian brewer Meta Abo. I expect DEO to continue to aggressively acquire other smaller spirits makers and for the acquisitions to have a positive effect on future earnings and cash flow.

Details

Today's Open

$99.40

Previous Close

$98.64

Day's Range

$99.21 - $99.77

52 Week range

$72.27 - $104.67

Beta

0.75

Avg. Volume (10 Day)

492,629

Put/Call Ratio (1 Day)

1.8

Put/Call Ratio (30 Day)

0.6

Earnings TTM (GAAP)

Earnings per Share (12/31/2011)

$35.0837

Price/Earnings

23.87

Forward P/E

22.31

Details

Dividends

Semi-Annual Div. (Ann. Yield)

$1.0506 (2.65%)

Previous Ex-Date

Feb 29, 2012

Previous Pay Date

Apr 13, 2012

Details

Shares

Market Capitalization (Large Cap)

$62.4B

Shares Outstanding

626.4M

Shares Held By Institutions

4%

Financial info provided by Charles Schwab.

The third reason for a potential investment in DEO is the above-average dividend. DEO stable business mix allows it to comfortably pay an above average dividend. The company has recently raised the dividend by 7%, signaling its strong commitment to returning money to shareholders. With interest rates abysmally low a 2.65% and growing is far better than most fixed income opportunities. In my opinion, a patient investor would wait for a pullback to the $88-90 range before initiating a new position in DEO. I am hopeful as the summer unwinds and the fiscal crisis in Europe drags on that DEO will trade lower.

DIsclaimer: The above referenced article is for informational purposes only.

Source: Using European Uncertainty To Invest In Wide-Moat Distiller Diageo