Diageo: Safe Play in Today’s Environment (NYSE: DEO)

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Diageo (NYSE: DEO) is one such company that trades at a near-chronic premium. Why? Because the company is one of the largest brewing/distilling/vintage companies in existence, with a market capitalization of over $100 billion. It’s a global giant with the kind of security you find in government institutions.

Let’s see what it can offer you right now. In my last Diageo article, I established the company as sort of a very solid game. In 2020 when I wrote about this company, it was a buy for me, and the company has been doing well ever since.

Diageo Performance

Diageo Performance (looking for Alpha)

Revisit Diageo

Diageo is one of those companies that performs and performs regardless of the market climate. Who doesn’t want a drink once in a while? This is certainly what the company relies on, and it does very well. Revisiting the company gives us a very positive view of Diageo.

The company delivered organic volume growth, net sales growth, superb overall operating margins, a 5% increase in interim dividend and superb EPS growth of 22.5%.

The company’s FCF was down around £200m, but still – globally there was no weakness at Diageo, despite everything.

Diageo Global Results

Diageo Global Results (Diageo IR)

This company is one of the best brand builders all over the planet. Although the supply chain, even for Diageo, has had some issues, there has been no break in that supply chain as far as things go. The company’s global leadership position and wide product range continue to position it in a spiral of brand self-reinforcement, a key factor in producing the above-average profitability and growth that we have seenup to a ROCE of 12%+.

Despite the issues, Diageo continually demonstrates its ability to improve marketing and sales, strengthen its competitive advantage and deliver strong revenue performance. It is also by far the best-positioned company for products such as scotch, tequila and IMFL, which represent superior growth engines and higher-margin products.

Diageo is a company that other companies watch and to wish they had in their own operations.

Diageo Presentation

Diageo Overview (Diageo IR)

1H22 was a report that dispelled doubts and fears, exceeding analysts’ expectations. Fears about the end of year celebrations in Europe, where consumption in bars and restaurants has been undermined, have been swept away. Diageo refuted them with strong sales.

More than that, the company has seen continued margin expansion despite inflation and rising costs, and not small either, but over 110 basis points in a single period. The company has spent significant sums on marketing. Despite this, the company has always topped things off here.

There are, in fact, very, very few downside risks and news here for the company. The only point really is that no qualitative guidance was given – beyond this short-term volatility, including the impact of COVID-19, supply chain issues, etc.

Diageo Presentation

Diageo Overview (Diageo IR)

However, Diageo was able to handle these issues in a superb way – so I’m not worried at all here.

The company seeks to realize more cost savings in the future, in various ways, including but not limited to purchasing, logistics, manufacturing, marketing and cost efficiencies. generals. The company is targeting around £190 million in savings from the measures.

Basically, Diageo remains absolutely solid. The company has a leverage target of 2.5X to 3X and is currently well below, and dividends are extremely well covered by earnings. That revenue isn’t going anywhere either, given what the company does.

Remember what I said in my original WD article.

However, in the end, it’s all really fluffy. What we’re looking for is Diageo – and it’s a company that makes its money by developing, producing and selling spirits, alcohol, beer and other alcoholic beverages. They do it all over the world and considering some of the brands they own, they are one of the best companies in the world to do it.

Nothing about the company or its excellent performance has changed. Even with COVID, WD has only seen a slight impact if you compare it to the larger context of things, with 2020 results down about 12% at the EPS level. They have already recovered to pre-pandemic levels and beyond, and are currently set for double-digit growth in the future.

Based on this, I rate Diageo as an excellent performer and move on to review this company.

Diageo – Evaluation

Diageo’s valuation is a bit trickier because it’s still at such a massive premium of sorts. Diageo trades between 20-25X P/E in good times. Even after the current crash, it is still at 25.25X, with a price of $182/share. That’s expensive no matter how you do it, for a business that’s expected to grow about 10% a year.

Still, we also have to consider that Diageo is A-rated, has a well-hedged yield of 2.16% and, as I mentioned, will be able to deliver strong returns with ease. While on a historical basis you might have been able to pick up the business at less than 20X P/E, those times have typically passed very, very quickly.

Faced with the reality before us, Diageo is now too close to a 5-year average premium of 25X P/E, which technically allows this activity to generate above-market returns. Even inflation-beating returns, in this case, based on a 24.3XP/E in 2024E.

Diageo upside down

Diageo Upside (FAST graphics)

Whenever this company has a double digit edge, it’s time to be careful, in my opinion. Diageo might not be the kind of perk that will turn your $10,000 into $100,000 in a very short time, but you can go to bed knowing your money is hidden in booze – and the one of the best suppliers of this alcohol on the entire planet. You get yield, quality, and an upside premium, all if you’re willing to bet on a company that has made outperformance almost a part of its MO over the past few years.

Even a pandemic that forced people to live at home didn’t make the company’s EPS drop more than 12%.

S&P Global is giving this company a 22% upside, targeting an average price target of $222.5 based on a range of $167 to $250 for the NYSE-listed symbol DEO. 5 out of 6 analysts have the company at a “BUY” or “Outperform” at this price.

Again, not the most exciting. Some peers in the group are cheaper, and if you’re ready to get into beer, you have companies that have “real” 30-40% upsides. But if you want security and booze – well, then I have an answer for you at this price. And that answer is Diageo.

Although the analyst forecast accuracy is not 100% perfect, we are still at very decent conviction, and based on this assessment, I do consider it unlikely that we will see a downtrend. long-term. It is impossible to say how long this market decline will last. If we get a bear market or a severe recession, this stock could even fall below $160, but given Diageo’s relative beta, I consider such a development relatively unlikely.

In my original article, I gave WD a price target of around $150/share – but that was a long time ago. Business and the marketplace now demand superior security. I exceed that price target at $185/share, which puts DEO in “BUY” territory. I’m accepting the company bounty at this particular point because since I wrote my last article things have changed.

So, for now, DEO is a “BUY” here, even for me.


My thesis for Diageo is positive here.

  • It’s one of the highest quality beverage companies on the planet, and it typically trades above 25X. It is now close to less than 25X.
  • Because of that, and because of the market, I think it’s time to change my stance on WD, which I’m doing here.
  • I now consider DEO a “PURCHASE”, and the advantage of this purchase is at least 3%.

Remember, I’m all about:

  • Buy undervalued companies – even if that undervaluation is slight and not incredibly massive – at a discount, allowing them to normalize over time and reap capital gains and dividends in the meantime.
  • If the company goes well beyond normalization and enters overvalued, I reap gains and rotate my position to other undervalued stocks, repeating #1.
  • If the company does not go into overvaluation but is at fair value, or goes back down to undervaluation, I buy more if time permits.
  • I reinvest the proceeds of dividends, labor savings or other cash inflows as specified in point 1.

The company also meets several of my investment criteria.

  • This company is overall qualitative.
  • This company is fundamentally safe/conservative and well run.
  • This company pays a well-covered dividend.
  • This company has a realistic advantage based on earnings growth or multiple expansion/reversion.

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