Diageo plc (ADR) (DEO): Buy, Sell, or Hold?

To take advantage of emerging market growth, the company plans to rapidly expand in these faster-growing economies, making key acquisitions such as the Mey Icki business, Turkey’s leading spirits company, which brought in 291 million pounds in revenues in 2012.

Also, due to the strong performance of Scotch sales in 2012, growing by 12%, the company believes there is a lot more opportunity for growth in this area and has invested an additional 1 billion pounds in whiskey production.

5. Valuation: Consensus earnings forecast for 2013 is 103 pence per share giving it a forward price-to-earnings (P/E) ratio of 19, a premium to its 10-year P/E average of 15. It also returns a dividend yield of 2.15%, twice covered.

My verdict on Diageo
Diageo is a very good business. It has a good management team and a broad portfolio of market-leading brands that it leverages to earn high margins and excellent returns on capital. It has performed well over the last 10 years and it looks like it can continue producing similar results right into the next decade with an increasing presence in emerging markets and an ability to grow through acquisitions and strengthen its already impressive portfolio of premium brands. However, factoring in the continued uncertainty and weakness in the European region, a P/E ratio at the higher end of its historical range, and a dividend yield below the FTSE average, I think it’s already too expensive.

So, overall, I believe Diageo at 1,974 pence looks like a hold.

More FTSE opportunities
Although I feel Diageo is a hold right now, I am more positive on the FTSE shares highlighted in “8 Dividend Plays Held By Britain’s Super Investor.” This exclusive report reveals the favorite income stocks owned by Neil Woodford, the City legend whose portfolios have thrashed the FTSE All-Share by 200% during the 15 years to Oct. 2012.

The article Diageo: Buy, Sell, or Hold? originally appeared on Fool.com and is written by Zarr Pacificador.

Zarr Pacificador does not own any share mentioned in this article. The Motley Fool recommends Diageo plc (NYSE:DEO) (ADR).

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