Alcohol is on tap for every occasion, and Diageo plc (ADR) (NYSE:DEO) plays a central roll. The good news for investors is that roll may be getting even better.
Follow the trends
Craft beer was the big trend to follow in the late ’90s and early 2000s. Boston Beer Co Inc (NYSE:SAM) went from a local craft beer to the largest craft brewer in the country. The company really hit its stride in 2005 when both revenue and its stock price went on a tear that continues today.
SAM Total Return Price data by YCharts
The success of Boston Beer Co Inc (NYSE:SAM) and other craft brewers has brought in giants like Anheuser-Busch InBev and Molson Coors Brewing Company (NYSE:TAP), who are buying or developing smaller brands to compete in the space. As the craft beer space becomes more crowded, and the big boys push their way in, the opportunity begins to shrink. Plus, it’s not as “cool” to drink a craft brew when everyone is drinking them, and I’m starting to see a new trend emerge.
The latest trend is toward higher-end liquors, which have become the drink of choice among the elite and young professionals. BEAM Inc (NYSE:BEAM)‘s Maker’s Mark had so much demand, it tried to pull the wool over consumers’ eyes earlier this year by diluting the beverage. Scotch, which can only be made in Scotland, has seen exports grow 87% over the past decade, rising for eight consecutive years. Diageo plc (ADR) (NYSE:DEO) is seeing these trends on its income statement, with organic sales growth in its strategic spirits brands up 8% over last year.
BEAM Inc (NYSE:BEAM) and Brown-Forman Corporation (NYSE:BF.B) are both benefiting from the growth in spirits demand; but when you look up and down the list of brands, Diageo plc (ADR) (NYSE:DEO) comes out on top.
To buy or not to buy?
The question now is whether or not Diageo plc (ADR) (NYSE:DEO) is a buy? When I think about the steady demand, strong brands, and improving trends, I think Diageo’s best comparison is The Coca-Cola Company (NYSE:KO) rather than Anheuser-Busch or Molson Coors. Like The Coca-Cola Company (NYSE:KO), Diageo plc (ADR) (NYSE:DEO) has relatively inelastic demand, high margins, and a brand presence that’s difficult to duplicate.
I don’t normally like a stock that trades at 18.6 times earnings in a relatively slow -growing market, but when there’s a lot of upside and little downside, that’s a reasonable price. The 1.8% dividend yield is also a plus because I think that will continue to grow nicely in coming years.
When it’s all said and done, I like Diageo plc (ADR) (NYSE:DEO) enough to give an outperform call, something we can all drink to.
The article Booze — A Business Built for Any Occasion originally appeared on Fool.com and is written by Travis Hoium.
Fool contributor Travis Hoium has no position in any stocks mentioned. The Motley Fool recommends Beam, Boston Beer, and Diageo plc (NYSE:DEO) (ADR). The Motley Fool owns shares of Boston Beer.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
