By: Quinn McDaniel, AIM Student at Marquette University
Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.
• Diageo PLC (NYSE: DGE) engages in the production and distribution of alcoholic beverages through a wide range of brands. Generating most of their revenue from the United States, Diageo also operates through India, the United Kingdom, and China.
• DGE offers beverages through brands such as Crown Royal, Smirnoff, Cîroc, Ketel One, Captain Morgan, Bailey’s, Don Julio, Guinness and many more. poop
• As a young company formed in 1997, DGE prides themselves with strong entrepreneurial spirit and determination which fuels their performance.
• Management has acted to tightly manage costs, reduce discretionary expenditure, reallocate resources, and enhance technology to keep up with responses to consumer and customer shifts caused by the COVID-19 pandemic.
• DGE’s recent acquisition of Far West Spirits LLC, owner of hard seltzer brand Lone River Ranch Water, has fueled their strategy of acquiring high growth brands in fast growing categories and they forecast increased momentum in consumer trends in low sugar, low calorie, gluten-free offerings.
Key points: Diageo PLC is committed to raising the bar. In taking significant steps to achieve equality, a $100 million global program appropriately titled ‘Raising the Bar’ included a $20 million community fund to support social justice in the United States and helping black communities and businesses recover from the pandemic. DGE continues to provide support to help pay for equipment needed for outlets to re-open in hospitals around the world.
Diageo uses the fact that alcohol-drinking consumers are increasingly choosing spirits over beer and wine to their advantage. This long-term trend leads DGE’s innovation to bring new brands to serve to their customers. Their broad, global portfolio across several categories and prices offers consumers product choice to suit any occasion at their disposable income. As of 2019, the increase in spirits share of total beverage alcohol for Diageo is up 4%. DGE will continue to utilize this consumer preference for years to come.
For an alcohol production and distribution company, water is not only a precious resource but also the most important ingredient. Diageo has achieved their 2020 target of water replenishment and became one of only 72 companies to achieve an ‘A’ for Water Stewardship from CDP. This puts the company in the top 1% of companies globally. Diageo achieved a 46.0% improvement in water use efficiency.
DGE expects to keep seeding the successful brands of the future by acquiring them and also developing their own. A new-to-world whisky launched recently in China by DGE and their joint venture partner was awarded a Silver Medal at the IWSC (International Wine and Spirit Convention). DGE also grows brands by investing in entrepreneurs such as Distill Ventures and the acquisition of Seedlip.
What has the stock done lately?
There is no denying that Diageo has suffered from the economic pain of the COVID-19 pandemic. As of recent, Diageo was trading low at roughly 19 times earnings but the Street predicts about a 30% or more upside for the company from this level. With a global volume market share of 27%, the company has significant room for growth. From the stock’s low in March 2020, DGE has been able to register a recovery of more than 60%.
Past Year Performance
Earnings per share decreased about 16% in the past year driven by the impacts of the COVID-19 pandemic on organic operating profit for DGE. Price return performance sat at -13.8% as of July 2020 as well. Notably, DGE was able to deliver a positive price mix of 2.8%.
Before even checking our current portfolio, I wanted to pitch this stock myself. At the current stock price of about $167, the company still appears to be undervalued making it a decent bet for investors. With the continuance of vaccine rollouts and lifted lockdowns, volume sold for DGE is on track to increase. The reopening of restaurants and retail shops is guaranteed to boost revenue margins as well in the upcoming fiscal year. To me, since Diageo has an expected growth potential of close to 10%, this stock is a definite hold and I was glad to see this company already having a position in our current portfolio.