Is this Discounted Stock Too Good to Ignore?

THE VALUE INVESTOR: Best-in-class scale and brand loyalty make Diageo a stand-out consumer staples name now that it's shaking off the hangover from some ill-timed decisions

Philip Gorham 4 August, 2015 | 4:12PM

We think Diageo (DGE) has significant ability to continue to stave off competition, causing us to issue the shares with an economic moat rating of ‘wide’. Diageo is importance as a vendor to both on- and off-channel customers as a result of its broad product portfolios in large areas of distilled spirits, and we think it will benefit from the long-term trend of of building premium brands within alcoholic beverages. 

Although we would prefer to buy the stock at a wider margin of safety, we believe the 14% upside to our fair value estimate, which values Diageo at 19 times fiscal 2016 earnings, offers investors an opportunity to kick the tyres of this high-quality name.

The punches keep coming for Diageo. In the heady days before the financial crisis, Diageo enjoyed some of the strongest pricing power in consumer staples as drinkers paid a premium to trade up to distilled spirits. When the crisis hit, however, and with the multi-year premiumisation trend in reverse, Diageo had few levers to pull, having raised prices too high too quickly in the boom years. The hangover cure of lower pricing and slower organic growth has taken three years to take effect, and although Diageo is still struggling to reignite volume, last year was the first year it achieved real pricing in several years.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Diageo PLC2,775.00 GBX-0.27

About Author

Philip Gorham  

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