Saturday 30 August 2014

Analysis of Diageo

Diageo, a British alcohol producer

Company: Diageo

ISIN GB0002374006 | WKN 851247

Business: A British producer of alcohol containing liquids. The three pillars are: Spirits (they have several of the premium brands: Johnnie Walker, J&B, Tanqueray, Gordon, Captain Morgan, Smirnoff etc.), Beer (Guiness, Kilkenny, Tusker etc.) and Wine (Dom Perignon, Moet etc.). For the full list of their brands please go here.

Active: They are active world wide and are currently selling their products in over 180 countries.

P/E: 23.1

This company was analysed due to a request from Linus posted on Historical idiocy of mankind.

contrarian values of P/E, P/B, ROE as well as dividend for Diageo

The P/E of Diageo is far too high for me with 23.1 and the P/B is even worse with 7.2 which gives a very clear no go from Graham. The earnings to sales are great with 21% and the ROE is excellent with 31%! The book to debt is also a bit too low for my liking with 0.4.
During the last five years they have had a yearly revenue growth of 1% which is bad especially if one compare to analysis of Remy Cointreau 11% and analysis of Pernod Ricard 4% on the other hand it is easier to double your revenue when you are small and both are smaller companies. Still the 1% then gives a motivated P/E of 9 to 11 which means that Diageo is highly overvalued on the market today.
They pay a fully acceptable dividend of 2.9% which on the other hand represents 68% of their earnings so something must happen! Ideally higher earnings.

Conclusion: Graham is against them and so am I. They have plenty of high quality brands in good price levels and I have, I must admit, tasted several of them without knowing they belonged to Diageo. It is a great company but I find that today they are being traded at a too high level (too high P/E, P/B and ratio of the dividends being paid out) for me to have any interest of stepping in.

If this analysis is outdated then you can request a new one.


Fredrik von Oberhausen said...

Sorry, my mistake. Thanks for the feedback. I will directly remove it.

Linus said...

Thank you for your analys on Diageo.

They have a nice portfolio of popular brands and some focus on africa that i like, but the price don't see to match with the qulity of the companys financials.

I will keep Diageo on my radar if the price go down.

Fredrik von Oberhausen said...

Hi Linus,

You are welcome!

Yeah, I am thinking more and more about building a list of excellent companies with target prices and if they ever drop to that level then I will hopefully have some cash to push in...