Top 3%

If, like me, you enjoy a drink once in a while, you've probably sampled at least one of Diageo's product lines. The company owns a portfolio of premium brands including Guinness, Johnny Walker, Captain Morgan, Smirnoff, and Jose' Cuervo. They also own some of the fabled Islay distilleries which are near to my heart.

I think investors now have an opportunity to pick up shares of this top-shelf company at a very reasonable price. Guilamo has already drawn attention to Diageo's sterling ROE: this is a very well-run company indeed, and management pays careful attention to positioning their products in international markets. The current P/E of 15 reflects the market's expectation that slowing economic growth in the U.S., which accounts for a third of Diageo's sales, will have a big impact on the bottom line. Thus far, this hasn't proved to be the case, as alluded to in this WSJ article at:

http://online.wsj.​com/articl​e/SB121652​061964768027.html?m​od=yahoo_h​s&ru=yahoo

There is also a growth story here, and that's the market for premium liquors in Asia, particularly India and China, where the emergence of middle class consumers is one of the economic stories of this century (the other is energy, and how the two work together is a question for another post). Johnny Walker is something of a status symbol throughout East Asia, and a Chinese middle class in the hundreds of millions could drink a lot of blended Scotch over the next half-century or so. I was also surprised to learn, in a recent conference call, that Brazil is an important (and growing) market for Johnny Walker.

Clearly Diageo is able to create international demand for its premium products. Having the distilleries keep up with this demand is another issue, since blends are mostly raw spirit but rely on topping malts for flavor. Bad news for us Islay single malt snobs, but fortunately Diageo pays nearly a 3% yield, which should cover the cost of a bottle of Lagavulin now and then.

slainte!