Diageo PLC (DEO) A Bull Case Thesis

We saw a bull thesis on Diageo PLC (DEO) on ValueInvestorsClub by baileyb906. VIC is our preferred site because the ideas there are generally posted by aspiring analysts who try to optimize their research. We find the ideas presented on the site well thought out and worthy of a read. Click here for the full article. Below we summarized the DEO bull thesis. DEO shares were trading at $160 when this thesis was published.

Diageo PLC is a British multinational beverage alcohol company, with its headquarters in London, England, and is known as one of the most admired companies globally. It operates in more than 180 countries and produces in more than 140 sites around the world. It was the world’s largest distiller until being overtaken by China’s Kweichow Moutai in 2017. As per the 2020 rankings, DEO is one of the Global Top 100 Brand Corporations.

Capitalizing on its size, DEO has over the years ramped up its manufacturing and M&As to build up an spirit portfolio of scotch whiskey, rye whiskey, gin, rum, vodka and tequila. Many of these brands enjoy top slots globally, Johnnie Walker scotch and Captain Morgan’s being cases in point. The brand portfolio diversified by spirits, distribution channels, geography, and price tiers gives DEO a very strong edge in case of any major shift in the consumer taste.


DEO’s sluggish performance during the year 2020 is primarily attributed to its exposure to the on-trade business (bars and restaurants), which cost the company a 23% drop in organic sales at the onset of COVID-19. On-trade contributes 50% of DEO’s revenue in Europe, 20-30% in the US., and 75% of its beer sales in Africa. With western hemisphere seemingly edging out of the pandemic grip, DEO can expect a decent recovery in its on-trade business. In addition to an already robust China market, reopening of economies, backed by the accelerated pace of vaccinations, should help the company regain the pre-COVID level of sales and earnings.

Additionally, DEO generates 42% of its revenues from the developing world, which has the potential to add 750 million consumers, who are expected to join the rank of the middle class by 2030.


DEO has neither gone in the red nor over-leveraged its balance sheet or taken any hit to its long-term growth prospects. Yet, the stock has registered a 5% negative performance for the year. While DEO, at 25x forward earnings estimates, does not look undervalued on an absolute basis, it surely does so on a relative basis. In comparison to its European peers, DEO has superior valuations in all the primary yard sticks – forward P/E ratio, 5-year revenue, CAGR, current margins, and current net debt to EBITDA.

DEO also manages its high free cash flow very efficiently. In 2019, the company paid $2 billion in dividends out of the free cash flow of $3.3 billion. The remaining cash flow was used to pare the debt down to the targeted leverage of 2.5-3.0x, conclude M&As or conduct share buy-back. During pre-COVID time, DEO returned $2-$3 billion to shareholders via stock repurchase plans.

The analyst believed with high quality brands, decent balance sheet, diversified spirits portfolio, relative undervaluation, and strong market share, DEO should grow its earnings at 5-7%. This can create an steady 10% CAGR in its stock price.

See also 15 Most Expensive Alcohols in the World in 2021 and Most Valuable Alcohol Companies.