On Apr 05, 2013, we reaffirmed our Outperform recommendation
) 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
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
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
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
Companhia de Bebidas Das Americas
), which carries a Zacks Rank #1 (Strong Buy), as well as
Molson Coors Brewing Co.
Grupo Modelo, S.A.B. de C.V.
), both of which carry a Zacks Rank #2 (Buy), are worth to
consider. These companies offer attractive exposure to alcoholic
AMBEV-PR ADR (ABV): Free Stock Analysis
DIAGEO PLC-ADR (DEO): Free Stock Analysis
GRUPO MODELO-C (GPMCF): Get Free Report
MOLSON COORS-B (TAP): Free Stock Analysis
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