Diageo plc (DEO)’s Debate Between Analysts

Travis’ take
While Sean is seeing a decades-long pullback in demand for liquor, I’ve seen plenty of evidence that high-end liquors are on the rise. Maker’s Mark had so much demand that it tried to dilute its product before a PR backlash forced the company to go back on its plan. Scotch exports from Scotland are up 87% over the past decade, and this is showing in Diageo’s 8% organic growth in strategic spirits. Anecdotally, I’m seeing more whisky bars, tequila bars, and high-end Scotches on the menu around the country as consumers begin to trend toward these drinks.

Liquor isn’t a recession-proof business, and consumers are willing to trade down in bad times, but it’s not a business that fluctuates a lot year to year, either. When you hold strong brands such as Johnnie Walker, Crown Royal, Bailey’s, and Hennessy, you’re also a step ahead of lesser brands with less distribution power. I think that gives Diageo the kind of competitive advantage I want in a stable industry.

The stock’s value at 18.6 times earnings is only marginal, but this isn’t the kind of business you get cheap. Still, I like the 1.8% dividend yield and think we continue to see strong enough growth that the stock can outperform the market.

The final call
With two in favor and one opposed, it looks like we’ll be raising our glass to Diageo today. We do have concerns over the stock’s valuation, but these are allayed by Diageo’s superior market position and distribution infrastructure. There are not a lot of dominant liquor brands, and Diageo controls more than perhaps any other publicly traded company. All told, there are more reasons to buy than to sell, which is why we’ll be making an outperform call on our TMFYoungGuns CAPS page as soon as possible. We’re beating the indexes by about 400 points right now, and we’re hoping that Diageo can push our outperformance even higher.

The article Analysts Debate: Is Diageo a Top Stock? originally appeared on Fool.com.

Fool contributors Alex Planes, Sean Williams, and Travis Hoium have no position in any stocks mentioned here. You can follow us on Twitter: Travis at @FlushDrawFool, Sean at @TMFUltraLong, and Alex at @TMFBiggles.The Motley Fool recommends Beam, Diageo, and Molson Coors Brewing (NYSE:TAP).

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