Diageo (LSE: DGE) (NYSE: DEO.US) released its much anticipated interim management statement for the three months ended 30 September 2014 today, and the report made for interesting reading. City analysts have been waiting for this report from Diageo to assess how the company is coping in an uncertain economic environment.
Indeed, instability within Eastern Europe, a crackdown on spending by officials within China and a strong pound are all factors that have impacted Diageo’s sales.
Nevertheless, today’s trading statement seemed relatively upbeat. The company reported that cost cutting initiatives are ongoing, while sales to some emerging markets continue to grow and sales within China have stabilised.
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The time to buy
However, despite today’s relatively upbeat trading statement, Diageo’s shares are falling, although this is only making the company more attractive on a valuation basis.
For example, as the world leading alcoholic beverage producer, it seems reasonable to suggest that Diageo should trade at a premium to its smaller peers, but this is not the case. Peers Brown-Forman, Pernod Ricard and Remy Cointreau, some of the world’s largest and most respected alcoholic beverage producers, trade at an average forward P/E of around 23.
On the other hand, Diageo currently trades at a forward P/E of 17.6. If Diageo’s valuation were to rise to a similar level to that of its global peer group, then it is reasonable to assume that the company’s shares would be worth around 2,238p each, 32% above current levels.
One of a kind
Still, what really makes Diageo a great investment is the company’s portfolio of world-leading spirit brands, which are almost impossible to place a true value on.
In particular, brands such as Johnnie Walker and Smirnoff Vodka have built up a history and reputation for quality over many decades. It would be almost impossible for a new competitor to replicate the success of these brands. Johnnie Walker and Smirnoff has actually just been named two of the ‘Best Global Brands’.
There’s also Diageo’s game-changing newly acquired interest in India’s United Spirits to consider.
Not only does the deal with United give Diageo access to the world’s largest whiskey market, it also gives Diageo has access to United’s extensive distribution network. The network will allow Diageo to distribute its own beverages across India, as well as United’s existing product offering.
India’s alcoholic beverage market was estimated to be worth $16.4 billion during 2012, according to research firm IWSR, giving Diageo a huge new market to profit from.
Long-term nature
So, it’s clear that Diageo’s current valuation undervalues the company and investors are not fully taking into account the true value hidden within Diageo’s product portfolio.
