DIAGEO PLC ADRs $125 (New York symbol DEO; Conservative Growth Portfolio, Consumer sector; ADRs outstanding: 627.8 million; Market cap: $78.5 billion; Price-to-sales ratio: 4.2; Dividend yield: 2.5%; TSINetwork Rating: Above Average; www.diageo.com) is the world’s largest maker of spirits. Its major brands include Guinness stout, Smirnoff vodka and Captain Morgan rum.
In the first six months of its 2014 fiscal year, which ended December 31, 2013, Diageo’s sales fell 0.7%, to 5.9 billion British pounds from 6.0 billion a year earlier (1 pound = $1.86 Canadian).
Gains in Latin America (up 8%), North America (up 5%) and Africa (up 2%) offset weakness in Asia (down 6%) and Western Europe (down 1%).
Earnings rose 5.1%, to 1.6 billion pounds from 1.5 billion. Earnings per ADR gained 4.9%, to 2.55 pounds from 2.43 (each ADR represents four common shares).
Diageo recently raised its stake in United Spirits, India’s largest alcoholic-beverage maker, to 26.37% from 25.02%. A related accounting gain was the main reason for the higher earnings.
Moves like this will help Diageo reach its goal of getting at least 50% of its sales from emerging markets like Russia, Turkey and Vietnam by 2015, up from 42% in fiscal 2013.
The stock has gained 119.3% since we first recommended it in our July 2009 issue at $57. It now trades at 18.1 times the $6.90 per ADR that Diageo will likely earn in fiscal 2014. However, recent exchange rate volatility in emerging markets could slow its growth.
Diageo is a hold.
