DIAGEO PLC ADRs $118(New York symbol DEO; Conservative Growth Portfolio, Consumer sector; ADRs outstanding: 627.8 million; Market cap: $74.1 billion; Price-to-sales ratio: 4.7; Dividend yield: 2.3%; 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 agreed to acquire the 50% of Don Julio tequila that it doesn’t already own from Casa Cuervo in exchange for its Bushmills Irish whisky business. Diageo will also get $408 million when it completes the deal later this year.
Gaining full control over Don Julio is part of Diageo’s plan to use premium brands to expand in emerging markets. It will use the cash to pay down its debt, which totalled 8.5 billion British pounds (1 pound = $1.93 Canadian) on December 31, 2014.
Meanwhile, sales fell 0.5% in the six months ended December 31, 2014, to 5.90 billion pounds from 5.93 billion a year earlier. If you exclude brands Diageo recently sold and the negative impact of currency exchange rates, sales were flat. Earnings per ADR fell 14.0%, to 2.15 pounds from 2.50 (each American Depositary Receipt represents four common shares).
The stock has gained 107.0% since we first recommended it in our July 2009 issue at $57. It now trades at a somewhat high 21.1 times the $5.59 per ADR that Diageo will probably earn in the fiscal year ending June 30, 2015.
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