McIntire Investment Institute At the University of Virginia Diageo (NYSE: DEO) Prepared by Garrett Hynson| 9 February 2012 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 1
Agenda • Business Overview • Stock Chart • Basic Numbers and Ratios • Thesis Points • Risks or Signs That Possibly Indicate We’re Wrong • Trends to Monitor • Final Recommendation 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 2
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 3
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 4
Basic Numbers and Ratios • 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 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 5
Thesis Points • Diverse group of market leading brands • Strong global expansion strategy – Acquisitions – Market penetration with existing brands • Economies of scale • 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 6
Thesis Point: Diverse group of market leading brands • 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 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 7
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 8
Thesis Point: Strong Global Expansion Strategy by Acquisition • 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 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 9
Thesis Point: Strong Global Expansion Strategy (Penetration) • 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 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 10
Thesis Point: Economies of Scale • 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 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 11
Thesis Point: Flexible Strategy with Good Leadership • Many brands; some fairly inactive • Ciroc and Diddy – Profit-sharing: Creative management • Brand strength can have residual affects – Jeremiah Weed – Smirnoff Ice 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 12
Risks/Signs to Indicate We’re Wrong • 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. 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 13
Trends to Monitor • Expansion – Penetrating new markets – Economies of scale; lowering average distribution costs to improve margins – Continued acquisitions • Continuing to increase market share, particularly overseas • Government intervention/social pressures • Creation of new strategic 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 14
Final Recommendation • 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 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 15
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