Diageo Sitting on the Cusp of a Whisky Boom

by Charles Sizemore | January 31, 2013 6:45 am

Back in June, I mused that Diageo (NYSE:DEO[1]) — the maker of Johnnie Walker Scotch whisky and other brands — was “The Ultimate 12- to 18-Year Investment.”[2] It was, of course, a reference to the length of time that Scotch needs to be aged to be marketable (or drinkable). Scotch can be officially be called “Scotch” after just three years of aging, but good luck convincing a discerning gentleman to buy it.

This is what makes Scotch such a fantastic business to be in. Unlike, say, vodka, which can be produced from anything, has little in the way of start-up costs and has no aging requirements, Scotch has incredible barriers to entry. Vodka brands come and go, but the scotch brands you see today are the same ones that were in your grandfather’s liquor cabinet.

(Note: Readers have asked me why I write “whisky” at some times and “whiskey” at others. “Whiskey” can be bourbon, Irish or rye whiskies. “Whisky” refers to Scotch or Canadian whisky only. I do not recommend getting these spellings confused in the presence of a Scotsman.)

Still, there’s plenty of growth to be found in Scotch.

Financial Times reported that there is something of a Scotch distillery boom[3] under way in Scotland. Over the next four years, £2 billion in new distillery investment is planned. To give you an idea of how big this is, the total value of Scotland’s whisky exports in 2012 was £4.3 billion.

Not surprisingly, the big names like Diageo are far and away the largest investors, but new craft distillers are popping up as well. These newcomers will have a hard time for the reasons I discussed in the prior article, but the fact that they exist at all is testament to the strength of the whisky boom.

As I’ve written before, the boom in Scotch and other luxury spirits is really an emerging-market boom, and particularly a China boom. As China’s new upper-middle class and nouveau riche climb the social ladder, they are developing a taste for premium Western brands. Much of the new whisky being distilled in Scotland will be shipped across the sea to China.

I’ve grown somewhat cautious toward booze stocks[4] of late, though I continue to hold Diageo on the Sizemore Investment Letter’s Drip and Forget portfolio and reinvest the dividends on autopilot. It’s just that at current prices, I am reluctant to make major new purchases.

But if your value tastes differ, Diageo remains a quality company on the cusp of a boom.

Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management.  As of this writing, he did not hold a position in any of the aforementioned securities. Click here[5] to receive his FREE 8-part investing series that will not only show you which sectors will soar but also which stocks will deliver the highest returns. The series starts November 5 and includes a FREE copy of his 2014 Macro Trend Profit Report.

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