DIAGEO PLC ADRs $126 (New York symbol DEO; Conservative Growth Portfolio, Consumer sector; ADRs outstanding: 627.8 million; Market cap: $79.1 billion; Price-to-sales ratio: 4.2; Dividend yield: 2.6%; TSINetwork Rating: Above Average; www.diageo.com) is the world’s largest premium alcoholic beverage company. Its major brands include Guinness stout, Smirnoff vodka, Johnnie Walker whisky and Captain Morgan rum.
The company recently offered to buy a further 26% of United Spirits, India’s largest distiller. This publicly traded business also imports and distributes alcoholic drinks made by companies outside of India.
Diageo’s offer is worth $1.9 billion. If successful, its stake would rise to 54.8%.
Buying control of United Spirits would let Diageo profit as India’s fast-growing middle class buys more premium spirits. The company’s expertise would also improve this business’s operations and marketing.
Meanwhile, Diageo’s sales fell 0.7% in the six months ended December 31, 2013, to 5.93 billion British pounds from 5.98 billion a year earlier (1 pound = $1.82 Canadian). If you exclude the negative impact of foreign currency exchange rates and brands Diageo recently sold, sales rose 2%.
Earnings per ADR rose 3.7%, to 2.50 pounds from 2.41 (each American Depositary Receipt represents four common shares).
The stock has gained 121.5% since we first recommended it in our July 2009 issue at $57. It now trades at a somewhat high 19.0 times the $6.63 per ADR that Diageo will probably earn in the fiscal year ending June 30, 2014.
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