Diageo: I'll Drink To The Great Stock Appreciation Recently

| About: Diageo plc (DEO)

Summary

The British company is eyeing an increased stake in United Spirits.

The company then reported earnings last week and it was a big surprise to investors.

The company announced that it was going to open a new Guinness brewery in Maryland.

Diageo (NYSE:DEO) has been one of those stocks which has been creeping up and been under the radar since the new year started. This is a consumer good sin stock which I picked up after the Brexit situation last year in hopes that it would rebound because the British Pound was getting weaker against the US dollar. At first the trade had not panned out the way I wanted it to but it has come along quite nicely as it is up 7.6% during 2017 so far. With the company having reported earnings recently it is important to examine the news to determine if the investment thesis has changed.

Just before the year started, Diageo had already owned a 55% stake in United Spirits, an Indian alcoholic beverage company. Diageo's position is currently valued at roughly $4.5B and the British company is eyeing an increased stake in United Spirits. As India's middle class becomes larger and more rupees are deposited into their pockets they will begin to consume more alcohol. More than 65% of India's population is under the age of 35 and once liquor touches those lips the spirits companies may have a few decades of revenues from this young demographic. By attempting to claim a bigger stake in United Spirts, Diageo is betting that the alcohol consumption growth rate of the country will grow quicker in a short amount of time.

The company then reported earnings last week and it was a big surprise to investors as they bid up the stock close to 6% before the market opened. After beating on the top line the company said it is poised to hit its goals for the year. With a 28% increase in operating profits the company was able to increase the dividend as well. These numbers were helped by volume increases here in the US. But one has to wonder if the supposed border tax will wipe out any gains that the company might realize from an operational perspective. For the first half of the fiscal year the company reported an earnings number of £0.60 per share on revenue of £6.42B which is an increase of 14.4% on the top line from last year.

On my earlier concern of a potential border tax, the company announced that it was going to open a new Guinness brewery in Maryland. That will definitely lighten any burden created by a potential border tax and the news appeased investors as the stock was bid up 0.4% on the news on the last day of January. The facility will include packaging and warehouse operations on top of the fermentation process and used solely for Guinness beers to be sold here in the US.

I actually initiated my position in Diageo in late September and have been happy with the purchase thus far. I will only purchase shares as long as they are below $108, because I believe that is where Diageo offers additional value. I've selected $108 because it is the average price of the 52-week range.

I swapped out of Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) for Diageo during the 2016 third quarter portfolio change-out because I was already heavy in technology stocks, ended up turning a profit in the name ( 2.1%, or 2.8% annualized), and wanted to lock in those profits. Since the swap, I made out on some gains as I've been lining the bottom with purchases in Diageo despite what the actual chart shows below. For now, here is a chart to compare how Diageo and Alphabet have done against each other and the S&P 500 since I swapped the names.

When it is all said and done, it matters what the stock has done in an investor's portfolio. For me, Diageo is one of my larger positions and has been performing decent, as I'm up 2.3% on the name, while the position occupies roughly 10.2% of my portfolio. I continue to believe in the name because the sin stocks do well in good times and bad. I own the stock for the speculation portion of my portfolio, and I will continue to hold onto the stock for now. My portfolio is up 15% since the inception while the S&P 500 is up 9.6%. Below is a quick glance of my portfolio and how each position is performing. Thank you for reading and I look forward to your comments!

Company

Ticker

incl. DIV

Portfolio

Skyworks Solutions Inc.

(NASDAQ:SWKS)

14.99%

10.48%

Electronic Arts Inc.

(NASDAQ:EA)

10.83%

3.74%

Facebook, Inc.

(NASDAQ:FB)

9.61%

9.48%

The Home Depot, Inc.

(NYSE:HD)

5.56%

4.78%

Eaton Vance Corp

(NYSE:EV)

3.08%

4.67%

Diageo plc

2.30%

10.21%

AbbVie Inc.

(NYSE:ABBV)

2.06%

3.78%

Silver Wheaton Corp.

(SLW)

-2.45%

7.46%

General Electric Company

(NYSE:GE)

-4.07%

4.69%

Starbucks Corporation

(NASDAQ:SBUX)

-6.20%

4.91%

V.F. Corporation

(NYSE:VFC)

-8.06%

7.90%

Gilead Sciences Inc.

(NASDAQ:GILD)

-10.42%

20.79%

Cash

$

7.11%

Disclaimer: This article is in no way a recommendation to buy or sell any stock mentioned. This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: I am/we are long DEO.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Tagged: , , , Beverages - Wineries & Distillers, United Kingdom
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