Diageo Plc. (DEO, Financial) is a British alcoholic beverage multinational having presence in 80 countries. The company was formed in 1997 through a merger of Guinness and Grand Metropolitan. Diageo is the world leader in the spirit segment with 28 malt distilleries and 2 grain distilleries. Its world renowned brands include Johnnie Walker, Smirnoff, Baileys, J&B, Buchan’s, Captain Morgan, Guinness, Sterling Vineyards and many other Wine brands. Some of its best sellers are Johny Walker blended whiskey, Smirnoff Vodka, Baileys Liqueur and Guinness beer. The company has its presence in 180 countries and it has made a fortune by putting people into high spirits, quite literally!
Since its inception Diageo has been acquiring stakes in alcoholic beverage companies across the world. Some of its major acquisitions have been Mey Lcki in 2011 for US$ 2.1 Billion, Ypioca in May 2012 for $300 Million, United Spirits in Nov 2012 for $1.28 Billion and many more. The company has also sold of non-core businesses like Pillsbury and Burger King. Diageo has been upgrading itself in terms of technology. It tied up with Google (GOOG, Financial) to allow fans a virtual tour of four of its Scotch whisky distilleries.
Today the company hit headlines with its warning to suppliers informing them about the company’s plan to delay the bill payments by three months. This has certainly not gone down well with many; especially in the currently stressed economy, especially in the Euro zone. This plan means that the suppliers are further stretched for liquidity and it would have a cascading effect on businesses directly and indirectly dependent on alcoholic beverages.
Stock Talk
Diageo has its primary listing on the London Stock Exchange and its secondary listing on NYSE. Diageo along with other peers and cigarette manufacturers are also referred to as sin stock. Some of its key competitors are Anheuser-Busch Inbev SA (BUD, Financial), Constellation Brands Inc. (STZ, Financial), Pernord Ricard. The stock movement has been variable. It is currently trading at lower levels and the chance of an upward swing in the near future is most likely due to increasing market demand for alcoholic beverages. But the extension in credit period for paying off bills has raised an alarm and investors are advised to tread in carefully. In March 2012 Diageo also shifted its 200 year old Johnnie Walker Scotch whisky facility from Kilmarnock to Fife in Scotland. In the new facility Diageo employed 400 employees against 700 employed at Kilmarnock. Both these moves are clearly indicative of financially thorny times for the company.
Industry Conditions
There will be a modest growth of 2.7% this year. The situation will be much more encouraging as compared with last few years, thanks to the dropping oil prices, recovering US dollar and economy. People are slowly returning to their vices and this trend rings in positive bells for alcoholic beverage manufacturers like Diageo Plc.
Conclusion
It would be logical to hold the stock for some time and release it from the portfolio only once price reaches in the profitable zone. The stock is definitely a buy for long term players as the stock is expected to reap decent returns over a period of time. Investors are advised to also consider Diageo’s competitors if having an alcoholic beverage stock in ones portfolio is the intention.
