Diageo plc (ADR) (DEO), Anheuser-Busch InBev NV (ADR) (BUD): Investment Insights From The Grocery Store

Current valuations and branding power

Looking at EV/EBITDA, multiples can be quite effective when we want to take a look at valuations within comparable businesses. I would group Unilever with Colgate Palmolive (NYSE:CL) and Procter & Gamble (NYSE:PG) . The 2013 EV/EBITDA multiple for this group is 13x, 12.5x and 12.5x. The group’s P/E multiple trades at around 20x and all three companies pay a cash dividend yield between 2.3% and 3%. Meanwhile, companies that I would call “brand strong,” such as Diageo plc (ADR) (NYSE:DEO), AB InBev or the mighty Coca-Cola (which might be the strongest of all), trade at 2013 EV/EBITDA multiples of 14.5x, 12.6x and 14x. Their 2013 expected P/E is also around 20x and they pay an average cash dividend yield of 2.4%, versus 2.8% for the former group.

Conclusions

The market seems to be recognizing some valuation premium for companies that are more focused on selling branded products. But, is the current valuation premium enough? It’s tough to say what would be a fair premium, but it’s relevant to keep in mind that a difference exists for a reason. Brands give pricing power, and that fact should be recognized by valuation multiples. If a company has great distribution and brands that people identify with, its future cash flows are safer than those at companies that only have great distribution networks. If you are looking into CGCs, you should keep this difference in mind. In the long term, it might make a huge difference in your portfolio. Again and again, I repeat, “Value is what you get and price is what you give.” Try to get the most for your money!

The article Investment Insights From The Grocery Store originally appeared on Fool.com and is written by Federico Zaldua.

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