Drinking your Way to Profits
Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Drinking might not be good for the health of the drinker, but somebody else’s drinking habits could prove to be good for an investor. There’s a lot of money to be made in beers, as the demand is always there. The industry performs well, whether the economy is performing well or not, and that’s what I like about such industries. Diageo is one such beer manufacturer; here are a few reasons to be bullish about it.
An intro
Diageo (NYSE: DEO) is a United Kingdom based spirits manufacturer and marketer with a wide portfolio of alcoholic products. The portfolio consists of 20 major premium brands like Smirnoff, Crown Royal, Guinness beer, and Johnny Walker. The company has many brands consumers are willing to pay a premium for. The company has a market in more than 180 countries and is the number one international spirits company in Asia and Africa. The company expects revenues from emerging markets to be 50% of the total by 2015 through acquisitions and targeted investments.
Earnings
The company recently posted its preliminary annual results. A 13% jump in the annual earnings was forecasted. The net revenue growth stood at 6% and the volume grew by 2%. Gross profit margins grew by 10.2% and the net profit margin increased 9% all numbers compared to the year ago. On a quarterly basis emerging markets saw a 15% rise in sales with net profit margin increased to 23%.Overall, the results were good primarily because of a strong global demand and results that exceeded analysts’ expectations.
Fundamentals
Shares of Diageo trade at 21.98x P/E along with 2.39x PEG. The stock is fairly priced, and not overvalued like its competitors. Brown Forman Corporation’s (NYSE: BF-B) shares trade at 25.44 trailing P/E and 2.22x PEG; which are overvalued compared to Diageo. Beam Inc. (NYSE: BEAM) is on the more expensive side and has its shares trading at 50.75x P/E and 4.37x PEG. Beam performed well this year beating the market. The stock is 17% up YTD but the steep valuations don’t offer any headroom for more appreciation.
Dividend
The company in its most recent press release stated that the company had increased the dividend yield 8%. With such a strong dividend yield, and good financial results, this stock could make it up to any dividend growth portfolio. Brown Forman yields a meager 1.45% and Beam Inc. yields 1.41% clearly making Diageo the stock to be picked.
The buy-out frenzy
The company in a bid to expand its operations is in talks on buying Jose Cuervo for $3 billion. The company had also announced a $1.58 billion plan to set up a new distillery to venture further into the market of Scotch Whiskey. Other brands that have been acquired are Mey Icki ,Cachaca, Ypióca and Meta Abo. The company made headlines in India, when it started talks of buying a stake in United Spirits which is owned by the Indian billionaire, Vijay Mallya. Analysts believe that such aggressive acquisitions could continue, which could be beneficial for the company.
Conclusion
The industry is relatively stable, and not too much dependent on the state of the economy. With a wide range of brands in the kitty, and good financials in the books, Diageo looks good. When we look at the fundamentals and the acquisitions that the company has been involved in, Diageo looks even better. The impressive dividend yield turns out to be the final blow that locks the stock with a strong buy rating.
PiyushArora has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Beam and Diageo plc (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
