First Star: Diageo
In the wine, beer and spirits business, the stock with the lowest multiple at the current time is none other than Diageo (NYSE:DEO), the world’s biggest liquor company. Its enterprise value at the moment is 14.9 times EBITDA. That compares to 17.6 times for Brown-Forman (NYSE:BF.B) and 17 times for Beam (NYSE:BEAM), its two nearest publicly traded rivals. In fact, about the only company that has a lower multiple of all the major players in the alcoholic beverage industry is Anheuser-Busch InBev (NYSE:BUD) with a multiple of 12.3.
So why Diageo is valued this way?
I truly don’t know.
In the first nine months of fiscal 2013, organic net sales increased 5%, with a 1% improvement in volume. Four of Diageo’s five regions saw organic net sales increase by at least 4%, with North America reporting a 6% increase. Approximately 42% of its business is in high-growth markets like Latin America and Africa, its operating margin is as high as it’s ever been at 30%, and its balance sheet is remarkably unleveraged for a company of its size. And DEO owns more than a quarter of the 100 biggest premium liquor brands in the world.
Diageo’s performance year-to-date has been mediocre, up just 3% year-to-date — lower than its winery and distillery peers, as well as the S&P 500. However, its returns are much more favorable over the past couple years, and long-term, I think DEO will return to its outperforming ways. Sustainable earnings are the key to growth, and Diageo does that better than most.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.