On Apr 05, 2013, we reaffirmed our Outperform recommendation on Diageo plc. (DEO) following an assessment of its first half of fiscal 2013 results and other positive developments such as product innovation and strategic acquisitions.
Why the Reiteration?
On Feb 4, 2013, Diageo reported strong fiscal 2013-first half results driven by organic growth of its strategic brands all over the world and improved performance of its Johnnie Walker and Ciroc brands. Earnings in the first half of fiscal 2013 ended Dec 31, 2012 went up 9% y/y to 60.9 pence (97 cents* per share) from 55.9 pence (89 cents** per share) in the same period of fiscal 2012. Increased reach to the burgeoning middle class coupled with fast penetration of the company into emerging markets also contributed to the earnings growth.
On a reported basis, net revenues (i.e. total revenue minus excise duties) increased 5% to £6.0 billion ($9.6 billion) in the first half of fiscal year 2013. On an organic basis, revenues increased 5%, while volumes grew 1% from the prior year.
Following the release of first half results, the Zacks Consensus Estimate for 2013 went down 1.8% to $6.38 per share. The Zacks Consensus Estimate for 2014 has also declined 2.4% to $7.04 per share.
Recent events also made us more optimistic about its growth prospects. The acquisition of a 53.4% stake in India’s largest spirits company United Spirits Ltd. immediately extended its reach to one of the most populous countries in the world. An added positive is India’s growing middle class and its beer consumption trends.
The renewal of Diageo’s distribution agreements with Minnesota-based broker United Brokerage, Inc. and privately-owned wholesaler of wine and spirits Johnson Brothers will also go a long way to solidify its position in traditional markets.
Diageo has a leading position in the beer and vodka market with a strong portfolio of globally recognized flagship brands, including Smirnoff, Johnnie Walker, Captain Morgan, Baileys and Guinness.
The company also upgraded its products through continuous innovations. In the first half of fiscal 2013, Diageo successfully launched Crown Royal Maple Finished and Smirnoff Iced Cake variants of whiskey and Bulleit 10 variant of vodka which helped the company gain market share in North America. The company also strengthened its beer brand portfolio in Africa by launching Dubic lager, Snapp and Malta Guinness having low sugar content.
Diageo is also a leader in the whiskey category and is geared to strengthen the segment by an additional £1 billion ($1.6 billion) investment in Scotland for its whiskey production. The company is expanding its existing whiskey production facilities in the region and spreading into new locations.
The company started a restructuring program and is reviewing its operating model to improve productivity and reduce costs. We are optimistic about the effectiveness of the model once it becomes operational by June 2013.
Other Stocks to Consider
Stocks like Companhia de Bebidas Das Americas (ABV), which carries a Zacks Rank #1 (Strong Buy), as well as Molson Coors Brewing Co. (TAP) and Grupo Modelo, S.A.B. de C.V. (GPMCY), both of which carry a Zacks Rank #2 (Buy), are worth to consider. These companies offer attractive exposure to alcoholic beverage segments.
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