McIntire Investment Institute At the University of Virginia Diageo - - PowerPoint PPT Presentation

M c I n t i r e I n v e s t m e n t I n s t i t u t e

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McIntire Investment Institute

At the University of Virginia Prepared by Garrett Hynson| 9 February 2012

Diageo (NYSE: DEO)

M c I n t i r e I n v e s t m e n t I n s t i t u t e

• Business Overview
• Stock Chart
• Basic Numbers and Ratios
• Thesis Points
• Risks or Signs That Possibly Indicate We’re

Wrong

• Trends to Monitor
• Final Recommendation

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Agenda

M c I n t i r e I n v e s t m e n t I n s t i t u t e

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Business Overview

• The largest premium spirits business in the

world

• Operates in over 180 markets worldwide
• Many strong brands in a variety of types of

liquors – 8 of the top 20 premium spirits brands

• Owns a 34% stake in Moet Hennessey
• Owns Guinness

M c I n t i r e I n v e s t m e n t I n s t i t u t e

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Stock Summary

M c I n t i r e I n v e s t m e n t I n s t i t u t e

• Price: $92.66 (as of closing 2/8/2012)
• Market Cap: 63.8 billion
• P/E: 19.2
• Yield: 3.4%
• Dividend Payout Ratio: 51%
• Revenue Growth (3 year trailing): 7.1%
• EPS Growth (3 year trailing): 9.5%
• Debt to Equity: 1.7

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Basic Numbers and Ratios

M c I n t i r e I n v e s t m e n t I n s t i t u t e

• Diverse group of market leading brands
• Strong global expansion strategy

– Acquisitions – Market penetration with existing brands

• Economies of scale
• Flexible strategy with good leadership

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Thesis Points

M c I n t i r e I n v e s t m e n t I n s t i t u t e

• 8 out of the top 20 brands
• Owns the number one brand by volume

(Smirnoff)

• Owns the number one brand by value (Johnnie

Walker)

• Diversity – vodka, rum, tequila, gin, liqueurs,

beer, wine

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Thesis Point: Diverse group of market leading brands

M c I n t i r e I n v e s t m e n t I n s t i t u t e

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Thesis Point: Diverse group of market leading brands

M c I n t i r e I n v e s t m e n t I n s t i t u t e

• Focusing on expansion by acquisition

– “Buying the national drink”

• Serengeti Breweries Limited – Tanzania
• Halico (spirits producer) – Vietnam
• Rum Creations Products – Guatemala
• ShuiJingFang – China
• Kenya Breweries Limited – Kenya

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Thesis Point: Strong Global Expansion Strategy by Acquisition

M c I n t i r e I n v e s t m e n t I n s t i t u t e

• Trying to penetrate the market with its existing

brands

• Brands such as Ciroc, Smirnoff, Ketel One, Jose

Cuervo are seen as premium brands and act as a status symbols

• Gaining market share both with brands it

acquires and existing brands

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Thesis Point: Strong Global Expansion Strategy (Penetration)

M c I n t i r e I n v e s t m e n t I n s t i t u t e

• Hourglass effect
• Has partnered with Moet-

Hennessey as a distributor

• Consolidation in the

industry

• Acquisitions provide

existing distribution routes for which to sell existing products

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Thesis Point: Economies of Scale

M c I n t i r e I n v e s t m e n t I n s t i t u t e

• Many brands; some fairly

inactive

• Ciroc and Diddy

– Profit-sharing: Creative management

• Brand strength can have

residual affects

– Jeremiah Weed – Smirnoff Ice

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Thesis Point: Flexible Strategy with Good Leadership

M c I n t i r e I n v e s t m e n t I n s t i t u t e

• 14 strategic brands made up 65% of sales
• Failure to expand at the right pace
• Potential overvaluation – high metrics
• Government intervention – sin taxes; alcohol

can be a high proportion of revenue

• Social pressures – MADD, etc.
• Competitors: inBev, Bacardi, etc.

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Risks/Signs to Indicate We’re Wrong

M c I n t i r e I n v e s t m e n t I n s t i t u t e

• Expansion

– Penetrating new markets – Economies of scale; lowering average distribution costs to improve margins – Continued acquisitions

• Continuing to increase market share, particularly
• verseas
• Government intervention/social pressures
• Creation of new strategic brands

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Trends to Monitor

M c I n t i r e I n v e s t m e n t I n s t i t u t e

• Initiate a purchase at 3%
• Monitor the stock according to the important

trends to follow

• Consider scaling up the position

– If more favorable conditions appear – If stock appears undervalued

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Final Recommendation